VFC: Right for the Wrong Reasons

VFC likely has enough gas in the tank to make numbers on Thursday, but we think that the consensus is right for the wrong reasons. We are in line with the street at $1.46 for Q4, and would not be surprised to see a beat (in typical VFC style). Next year they HAVE TO do a deal in order to hit estimates, which they are likely to do. Both forward trends and yy compares look decent for 2 quarters until then. These guys are wizards at financially engineering their way out of a negative growth scenario, and managing expectations accordingly. I don’t have any ammo to suggest that this will break fundamentally.


Revenue: Should print a flat to slightly down top line vs. a -2.2% last year. Then they go up against a -6.5% and -11.4% in 1Q and 2Q, respectively. This happens at the same time a 3-5% FX drag turns into a 2-3% tailwind.  Also, VFC has accelerated store growth and added almost 90 retail stores over the past 4 quarters, which naturally boosts sales as mix shifts to fully captured-retail sales instead of shared wholesale. Putting it into numbers, VFC grosses about 1.5mm annually per store, with about $400k in the fourth quarter. All said, we’re looking at a 1.5%-2% boost in revenue simply from the addition of VFC retail. So we’re looking at a boost from retail and FX and even a point in growth from acquisitions – which is in consensus numbers.  I’m not sure that the consensus knows why it’s right. But that might not matter.


Margins: Gross Margin compares are easy in 4Q and ridiculously easy in 1Q. And yes, both retail and FX will start to help. The consensus numbers only have a 1pt GM rebound in 1Q – even though they face a -3pt compare vs. last yr. Considering how FX was blamed for a good portion of 1H 08’s declines, it alone should get them a point in recovery. As guided, nothing major on SG&A, though higher retail costs will pinch a bit. I actually like how they’ve been investing in SG&A despite downturn over past 6 quarters. This makes them either careless, or good, proactive managers. They’re the latter.


Balance Sheet/Cash Flow: Inventories have been tight in 2009 and should continue in Q4 and 2010. Capex coming down this year to 1.5% of sales. Good near term. But can’t go any lower. It will need t go up next year, which will pinch cash flow later in the year. For now it’s a wash.


VFC: Right for the Wrong Reasons - 1


VFC: Right for the Wrong Reasons - 2


VFC: Right for the Wrong Reasons - 4

Good Old Germany

Position: Long Germany via the etf EWG


We got a bullish report on German imports and exports today for the month of December, with exports up 3% and imports +4.5% versus the previous month. Importantly for the export-heavy economy (exports account for ~ 40% of GDP), December’s reading could suggest an improving trend in 2010. With 5% contraction in German GDP last year and a 18.4% downturn in exports and 17.4% contraction in imports, compares will be easier in 2010.


While we still expect mild growth this year for Germany (and much of the Eurozone), the recent heightened market volatility in Europe over the PIGS affirms our view in owning a lower beta play and countries with “sound” balance sheets.  Although Germany, with a budget deficit that may swell to 5.5% of GDP, exceeds the Eurozone’s 3% limit, it’s a far cry from the 10-13% levels of the PIGS and double that of the USA.


Additionally, we’ve had our Hedgeyes on German inflation and employment, both of which have remained resilient over the last months since Germany returned to growth quarter-over-quarter in Q2 ’09.  CPI was up 0.8% in January Y/Y, in line with the Eurozone average of 0.9%. And while we haven’t ruled out a gain in unemployment over the intermediate term, which currently stands at 8.2%, we’d expect the government extension of subsidized short-time employment to mute significant gains. Stay tuned.


Matthew Hedrick


Good Old Germany - tradege



The Federal Reserve Senior Loan Officer Survey came out on Feb 1. There was no material change in trend from the last few surveys. That said, this survey did mark an inflection point of sorts in that the net percentage of banks tightening vs. last period was actually zero (for C&I loans). In other words, on average, banks have finally stopped tightening their lending standards on C&I. The following chart demonstrates. For reference, the chart shows a blend of the large, medium and small bank survey data.




The below chart looks back to 1992 and 2003 as the prior two instances when the banks stopped net tightening. Financials traded higher over the two-year periods following the point at which banks stopped tightening. However, we should point out that in both 1992 and 2003 Financials were relatively range-bound for the first 4-5 months thereafter, for the most part staying within a +/- 5% band. We use an equal-weighted basket of 20 mid-cap and large-cap banks that traded back to 1990 for our benchmark.




Banks are still tightening in some asset classes, however, such as CRE loans. The following chart shows that 30% of banks put the brakes even harder this quarter on the CRE front. That said, the trend clearly shows we're closer to the bottom than the top on CRE - an important read through to credit quality for the regional banks.




At the consumer level, banks continue to tighten on residential real estate loans.




Meanwhile, consumer demand for mortgage loans fell materially in the fourth quarter. The increase in prime residential mortgage loan demand dropped from +28% to -8% linked quarter, while the change in demand for nontraditional mortgages fell from -4% to -35%. Subprime data hasn't been recorded for 4 quarters now.




What we find really interesting is the fact that banks are now finally more willing to lend, but consumers are pulling back at a growing rate, even as unemployment is leveling off and starting to decline.




Conclusion. We think the conclusions are four-fold. First, Financials have historically risen in the wake of banks reaching the zero-line with respect to net tightening on C&I loans. The caveat is that they haven't done much for the first 4-5 months of that two-year period, which would correspond to Feb 2010 - June 2010. Second, commercial real estate tightening, while still underway, has fallen from 87% to 27% in the last 5 quarters in, more or less, a straight line. We think this bodes positively for regional banks with CRE exposure. Third, residential mortgage loan demand dropped in both the prime and nontraditional categories. We think this bodes poorly for future home price trends. Fourth, demand for non-mortgage consumer loans continues to drop at an increasing rate in spite of banks actually now easing their standards for such loans. This tells us that the consumer's demand for incremental credit continues to abate - a near-term negative for lenders, but probably a long-term positive for the country.


Joshua Steiner, CFA


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GIL: Poised for Another Good Quarter

Gildan reports after the close today and looks poised for another beat with upside likely to continue over the next 1-2 quarters. Interestingly, this synchs fairly well with HBI. Though they are both perceived to be fairly similar from a business standpoint, their earnings trajectories over the past 3 years have been on different paths. For the next 2 quarters, they are both setting up to post solid results, but sustained intermediate-term outperformance will require the consumer to show up 3 quarters out as an offset to elevated commodity prices. As a reminder, GIL is far more exposed to cotton than HBI (~33% of COGS for GIL vs. ~6% for HBI).


Here’s a detailed look at the puts and takes for the quarter along with management’s prior outlook for 2010 from their Q4 conference call:


GIL: Poised for Another Good Quarter - GIL Q1Table2 2 10

GIL: Poised for Another Good Quarter - GIL Q1Table 2 10



F10 Outlook from 4Q Call:


Revs in excess of $1.2Bn (17%+)

  • Activewear unit growth ~25%
    • Will bring sales volume close to existing capacity
    • Assuming no industry growth
    • Continued penetration in Int'l mkts
    • Incl. new programs for underwear $70mm
      • mgmt commented could be conservative (is the minimum required sales for space they attained)
  • Sock unit growth ~5%
  • Approx. 5% decline in ASPs
  • Have several other programs in the hopper that could drive upside to topline

GMs: ~26% (impacted by promos & discounting)

  • cotton and energy costs for the first half of fiscal 2010 are expected to be materially lower than the first half of fiscal 2009 but are expected to increase in the second half of the fiscal year and to be higher than the second half of fiscal 2009

SG&A: ~11%-11.5% going forward (closer to 11.5% in F10)

CapEx ~$130mm (up from $45mm in F09)

  • Supporting retail strategy
  • Completion of Rio Nance 4 sock facility
  • Purchase of new office building in Barbados




If the rumors that Starbuck’s is testing or launching pour-over brew method equipment are true, it would signify a move back toward its coffee-house roots and providing customers with a fresh cup of coffee.  Suggestions include that the “pour over” launch could happen in approximately one month and that Starbucks will launch the “pour over” method in all non-Clover stores.  According to a blog on, the two “mercantile” non-branded Starbucks are already using the “pour over” as one of their main methods of brewing coffee.


Some are suggesting that this change could test baristas’ capacity and customers’ patience.  Either way, it shows a continuation of Starbuck’s policy of engendering a coffee-house feel for its customers.


I’m sitting in a Starbucks as I write and the Barista confirmed that the “pour over” method will be launched in a month.  Business continues to be very healthy for Starbucks.






Howard Penney

Managing Director



"We continued to see tangible signs of stabilization in our business in the fourth quarter. Attrition and cancellation levels continue to normalize. The 10.6 percent same-store attrition we experienced in the fourth quarter is a significant improvement over 14.1 percent in the fourth quarter of 2008. Our average group room rate booked in 2009 for 2010 has been slightly better than the average room rate actualized in 2009, a sign that travel and convention budgets are potentially beginning to return to historical levels. Additionally, our holiday programs drove incremental business in the fourth quarter and demonstrated that leisure consumer demand is stabilizing."

- Colin V. Reed, chairman and chief executive officer of Gaylord Entertainment


2010 Guidance

  • "As we look towards 2010, we have been encouraged by signs of market stabilization including lower attrition and cancellation rates and solid advance bookings. That said, it is difficult to have total visibility into what remains an unpredictable political and economic environment. We have closely examined our business and the factors that could impact it moving forward and continue to believe that top line demand will likely be flat in 2010, though there is potential during the year for RevPAR growth to enter positive territory. We do expect to see labor and benefit cost increases in 2010, as well as the full impact of our completed union contract at Gaylord National. All of these cost increases will combine to impact profitability. As always, we will remain prudent in how we manage our business including capital expenditures."
  • FY2010:
    • RevPAR -2.0% to 1.0%.
    • Total RevPAR: -1.0% to 2.0%
    • CCF guidance: $210-$226MM
    • Opry and Attractions CCF: $10-$12MM
    • Corporate and Other CCF: Loss of $44-$41MM
    • Total CCF: $176-$197MM

Highlights from the Release

  • "Gross advance group bookings in the fourth quarter of 2009 for all future years was 736,736 room nights, an increase of 18.7 percent when compared to the same period last year. Net of attrition and cancellations, advance bookings in the fourth quarter for all future periods were 453,093 room nights, an increase of 8.7 percent when compared to the same period last year."
  • "Same-store attrition that occurred for groups that traveled in the fourth quarter of 2009 was 10.6 percent of the agreed upon room block compared to 14.1 percent for the same period in 2008 and 9.9 percent in the third quarter of 2009. Same-store in-the-year, for-the-year cancellations in the fourth quarter totaled approximately 6,278 room nights compared to 15,332 in the same period of 2008 and 14,375 in the third quarter of 2009. Same-store in-the-year, for-the-year cancellations for the full year 2009 totaled approximately 116,735 compared to 74,673 in the prior year."
  • "The Gaylord National continued to gain momentum this quarter despite a challenging economy and at times, challenging weather conditions that made travel in and around Washington, D.C. very difficult. We continue to grow our revenue base and improve our operations, which we believe will translate into additional growth in 2010."
  • "Gaylord Entertainment's planned resort and convention hotel in Mesa, Arizona remains in the very early stages of planning, and specific details of the property and budget have not yet been determined. The Company anticipates that any expenditure associated with the project will not have a material financial impact in the near-term."


  • Looking back at 2009, its clear that their business model "worked"
    • Clearly their model was more defensive and predictable than their lodging peers.  Didn't need to keep modifying their guidance throughout the year
  • Contracts that they locked in in prior years, they cancellation fees offset some of the fundamental weakness
  • Deployed $45MM of cost cuts throughout the year
  • Average group room rate booked in 2010 has been slightly better than 2009
  • Given the fragility of the US and broader market, think that it is prudent to assume a conservative and slow market recovery.  Higher health care costs and compensation will also impact margins on a flat revenue base.
  • Not going to move on any "distressed" asset or otherwise, simply because they have liquidity.  Will only consider such opportunities to the extent they enhance their core brand and create shareholder value
  • Some of the 2009 cost reductions where volume related and will come back when occupancies do.  However, other changes like centralized call/reservation center, centralized sourcing, etc are sustainable.  They are continuing to look for more cost savings in their business
  • Heading into 2009 they re-focused their sales people to focus on short term bookings when large group weren't booking.  As they look to 2010, they are encouraged by the improved pace of business. Groups are picking up more banquet and outside of just "room" events. Rate booked in 2009 for 2010 is slightly better than the rate realized in 09. 
  • For 2011 have 36 points of occupancy on the books and almost 29% occupancy for 2012
  • New website launch is targeting to capture a larger portion of direct bookings
  • Produced a 21% increase in ICE admissions from Thanksgiving to NY day.
  • Weather continues to be a factor impacting the National
  • Think that the top line in 2010 will remain flat to slightly up, but costs will be up a little (HC/labor costs). Anticipate that 2010 will be another challenging year.
  • $290.2MM of availability under the R/C
  • Other than maintenance capex they have no significant capex to deploy in 2010, therefore, if they meet their performance expectations they should product significant cash flow


  • For apples to apples need to add back proxy & severance expense to 2009 to compare to 2010 guidance
  • Headcount levels flat for 2010, increases in health care (double digits for everyone), increases in labor costs (merit increase for example), impact from a full year of ratified union agreement at the National
    • So adjusted Corporate and other guidance compares to $38MM 
  • What sub segments of their business are they expecting the most improvement?
    • Seeing more corporate and association group business (although the association business was already on the books). Did $269MM of group revenues in 2009 and have $248.5MM of group already on the books for 2010
    • Seeing more activity on the corporate side
    • Assuming flat spending per delegate though
    • Transient delivery systems are better than what they had 2 years ago, so they are reasonable more optimistic that they will see more traffic
    • Seeing less attrition
    • Pickup for smaller in the year for the year bookings
  • Did the sequential increase from 3Q to 4Q continue into 1Q2010.  Had a strong Oct, decent Nov and a very strong December.  That worries them if they pulled forward from January. However, that didn't happen as they saw a substantial increase in y-o-y net bookings in January
  • Las Vegas? Would like to be in the West Coast at some point in time since their customers want to go to the West Coast.  Getting a study back from meeting planners that will help them decide how much interest there is.  Time is their friend in Vegas.  Consumer appetite for spending isn't getting any better over the next 12 months, and thinks that things will still get worse in Vegas before they get better.
  • National? Future thoughts on where they can get to from a profitability standpoint over the next 4-6 quarters
    • Hotel has a few things going in its favor (customer satisfaction) and if you believe that the federal government will continue to spend more money and that people will continue to visit the nation's capital, the property should continue to experience growth
    • National Harbor destination is also getting better: Condos that were for sale are selling and more retail is opening.
      • National Harbor - really early on in capitalizing of what that destination can mean for them as a destination. Leisure wise they do a lot of entertainment to drive transient opportunities. So Opryland runs at 75% occupancy during the holiday season while the National was in the 30's ... so as ICE ramps this is a big opportunity for them. Same thing for 4th of July - so if they can produce the right events they can do a better job filling in times when Group is weak
    • "Optimistic about the future of this hotel"
    • Maybe in the 4th-5th innings of maturation of this hotel
  • Thoughts on presence in Vegas?  Think that their delivery system is very valuable. They aren't going to stretch their companies balance sheet to full fill short term goals. Won't speculate on how they can do something or who they can do something without stretching the balance sheet
  • Capex in 2010: $50-60MM (mostly maintenance) and includes planning a resort pool at Cactus property
  • Transient vs. Group in 2009: $64.5MM in 2009 for transient expect transient to be 20% or so of the business in 2010
  • Rates for 2011? Are seeing more rate integrity for 2011 & beyond then what they saw in the early stages of the financial crisis
  • All of their hotels increased market share - they are #1 in all their markets
  • Any pressure in Orlando from additional competition?
    • Its generally a competitive market because there are lot of hotels that look like theirs. Had a big supply shock last year and this year have the Peabody, but nothing really after that.  Holding back inventory for future years because they expect things to eventually improve
  • Cancellation and attrition rates for 2010? Budgeting returning to levels consistent with 2008 (so still a little elevated over historical levels but down from peak 2009 levels)
  • Sweet spot for acquisitions size wise?
    • Will let you know when we have one. Any asset that they intend to plug in will fit with their strategy and will be financed in a way that doesn't stretch their balance sheet

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