February Rebound in Cotton

Following a breather in early 2010, cotton futures reversed sharply last week up $0.08/lb or 12%. Futures prices are now back up over $0.74/lb, nearing the highs of December (~$0.76/lb.). On recent earnings calls, both Hanesbrands and Gildan noted that their cotton costs were either locked in or hedged through 3Q. However, each of these manufacturers had a different view on what cotton costs may mean for pricing. 


While GIL noted that its plan was to not to pass through cost increases, HBI suggested that at a mid-$0.70 range in cotton prices gives the company an option to pass through increases given its success in passing on costs in the past. One thing to note is that HBI still has the benefit of using factory consolidation savings as an offensive weapon to offset commodity costs and by offering a better value proposition to consumers. GIL is out of gas. In addition, with GIL far more exposed to cotton than HBI (~33% of COGS for GIL vs. ~6% for HBI - or ~$0.13 in EPS for each 5 cent move in cotton), the negative implications for rising cotton prices are considerably greater for GIL. Recall that favorable y/y cotton and energy costs accounted for a 950bps increase in gross margins in Q1 for GIL. As a point of reference cotton contributed only 180bps to HBI’s most recent quarter. Needless to say, this will be one of many topics of discussion at HBI’s analyst day next week, which we’ll be commenting on real-time.


The bottom-line here is that while the setup continues to look favorable for both companies over the near-term, either a rebound in consumer demand or a decline in commodity prices will be needed 2-3 quarters out to sustain intermediate-term outperformance – neither of which were supported over the past week.


February Rebound in Cotton - Cotton 2 10




This quarter should beat consensus and guidance but all eyes will be on guidance for 2010. We’re at $1,385MM of revs and $236MM of Adj EBITDA for Q4 vs. consensus of $1,341MM and $226MM, respectively.





Trends & Outlook

  • “For the first time in seven quarters we did not experience a significant decline in transient room nights as the number of room nights sold this quarter matched the prior-year total. Demand in our corporate and special corporate segments fell by just 10% which was the lowest decline in the last five quarters and increases in demand for the lower rate segments fully offset this reduction leading to flat transient occupancy.”
  • “On the group side, the fallout from the cancellations experienced at the end of last year and the beginning of this year continue to take a toll on group occupancy.  The short-term net group bookings in the quarter for the quarter exceeded the levels obtained in both 2007 and 2008 and on a relative basis the number of overall net room nights booked in the third quarter for 2009 and 2010 improved significantly when compared to our results in the first half of the year. While the booking pace for the fourth quarter continues to trend behind last year’s pace, the booking cycle continues to be very short which offers the potential for additional pick up in the quarter. “
  • “As we look into 2010 we are pleased to see that our transient demand is improving albeit at lower rates because we expect that the first sign of better results will ultimately be driven by that segment. Our group booking pace for 2010 is still behind last year’s pace although the decline has moderated from what we had experienced earlier in 2009 and the combination of easier comps and the improving economy suggests that this gap should begin to close.”
  • “We still expect the combination of low occupancy and customers now accustomed to seeking lower prices will mean that rev par will continue to decline during the early months of 2010”
  • “As of yet there is little on the market that we find tempting but we continue to monitor activity and we expect to see deal flow improve in 2010 as the combination of lending debt maturities and depressed operating results create more motivated sellers or inadvertent owners. In fact, looking forward through 2014 there is over $30 billion of hotel CMBS debt that is coming due and although difficult to precisely calculate we think there is over $100 billion of hotel, bank and [license] company debt coming due during that time period…We would expect we would see additional assets begin to enter the market over the course of next year and into 2011. We intend to be opportunistic as market conditions evolve and are optimistic about the future prospects in this arena.”
  • “We expect the New Orleans Marriott to have another good quarter while the San Antonio market will underperform the overall portfolio in the fourth quarter due to a year-over-year drop in city-wide activity…. We expect the D.C. metro region to continue to outperform on a relative basis in the fourth quarter….We expect the New England region to perform much better than the overall portfolio in the fourth quarter due to growth in city-wide room nights compared to last year….We expect the Hawaiian market to outperform the majority of the Pacific region due to easier comparisons... We expect the Philadelphia market to continue to outperform the portfolio due to continued strength in business transient.”
    • New Orleans, Boston, Oahu did outperform, with metro area RevPAR up 5.8%, -8%, -2.4%,  respectively in 4Q09. 
    • DC and Philadelphia look like they only modestly outperformed the market, with metro-area RevPAR down 10.2% and 9.9%, respectively
    • HST’s properties should have performed better than the RevPAR  data suggests for these markets since Upper Upscale is recovering ahead of limited service segments, whose data is included in metro-area RevPAR statistics
  • “We expect the Atlanta region to underperform the portfolio in the fourth quarter due to lower group and transient demand and a more significant decline in rate... We expect the San Francisco market to continue to struggle due to weak group and corporate demand and Seattle will also likely underperform due to lower group demand and weaker transient business... We expect New York City to continue to struggle in the fourth quarter although we have seen positive signs from short leads with bookings.”
    • Atlanta looks like it only modestly underperformed the market, with metro-area RevPAR down 11.7%
    • The San Fran/San Mateo area looks like it actually outperformed the with smith travel reporting RevPAR of -9.9% in 4Q09
    • Seattle was indeed weak, with metro-area RevPAR down 17.3%
    • While STR data indicates that NY did underperform in 4Q09 with RevPAR down 13.4%, it looks like one of the strongest markets QTD in 1Q2010
  • “In the fourth quarter we expect the Tampa region to continue to outperform; the Miami/Fort Lauderdale region to struggle due to renovations at the Harbor Beach Marriott and the Orlando market to rebound based on improvements in transient and improved demand.”
    • STR data shows that Tampa was down 10.2%, Miami was down 10.9%, and Orlando was down 13.5% in the quarter
  • “In the context of describing weak demand at least in the beginning of 2010 that is really more of a rate commentary than anything else… A lot of the consensus projections out there right now seem to be expecting that employment will not pick up until the second half of the year and really show investment at this stage in 2010 as being relatively flat to 2009. Those are some of the factors that lead us to conclude it will probably take until the second half of the year before you start to see some sort of a meaningful rebound in RevPAR.”



  • “We would anticipate that our comparable hotel rev par decline would range between 20-22% for the full year which is slightly better than what we had projected in July which reflects our improved operating results this summer.”
    • We have HST coming in at -19.5% for 2009 given stronger results in 4Q09
  • “Looking at the fourth quarter we think comparable hotel adjusted operating profit margins will decline more than we experienced in the rest of the year primarily due to the significant level of fourth quarter 2008 high profit cancellation revenues, the high level of cost contingency measures implemented in the fourth quarter of last year and decline in average rates in 2009. As a result, we expect comparable hotel adjusted profit margin to decrease in a range of 600-640 basis points for full-year 2009.”
    • Given the somewhat better RevPAR performance we expect that hotel adjusted operating profit margins will decline 810 bps, but still expect EBITDA to beat consensus of $226MM by approximately $10MM
  • 2010 Guidance: “One way we have thought about it is if you go back to the last downturn and you look at the third year of the last downturn that being 2003 our rev par in 2003 was down 4-4.5 points and our margins were down around 300. If you think about what that may mean in a context of 2010 obviously if the rev par number is better than the margin number would have been better. I think there is some sense of guidance one could take from that as an estimate.”


Other commentary

  • “We continue to expect our capital spending for the year will total about $340 million… . I think our sense is our spending in 2010 will probably be slightly less than what we are doing in 2009.”
  • “There certainly are over the next 2-3 years a number of additional non-core assets that we would look to sell. Our sense is that we probably would not be that active over the next 12 months. … By and large at least as we think about 2010 right now I would expect that our disposition pace would probably be a bit lower than what we saw this year.”


PFCB is scheduled to report 4Q09 numbers before the market opens tomorrow.  The company continues to outperform its peers, up nearly 14% in the last month relative to the casual dining group’s average 7% move higher.  As I said on January 12, in a post titled “PFCB – 2010 NOT AS DIRE AS 2009,” I would not be surprised to see this name work on the long side, largely in response to the Co-CEO Bert Vivian’s more optimistic tone at the Cowen and Company Consumer Conference.  The company has a current short interest of 33%, the highest level among its peers.  Despite PFCB’s recent outperformance, this high short interest, combined with the fact that it has more sell-side analysts betting against it than any of its peers, only strengthens my conviction. 




My expectations for the quarter are in line with consensus from both a top-line and bottom line perspective.  My $0.40 4Q09 EPS estimate assumes a -5.0% comp at the Bistro and a +2.0% comp at Pei Wei, only slightly better than the street’s -5.3% and +1.8% comp estimates, respectively.  Operating margin should improve slightly YOY in the quarter, but management’s comments about current trends should matter more. 


The chart below shows how PFCB has traded one-day post earnings versus reported comp trends at the Bistro.  I think if we see the Bistro trends improve on a 1-year basis (as my -5.0% estimate would imply relative to -8.5% in 3Q09), the stock will likely move higher as well.  For reference, both -5.0% at the Bistro and +2.0% at Pei Wei would still imply some sequential deterioration on a 2-year average trend from 3Q09, which is in line with what we saw for the overall casual dining average as measured by Malcolm Knapp.  The -5.0% estimate assumes only a 25 bp quarterly sequential slowdown in 2-year average trends at the Bistro relative to the 125 bp sequential decline in 3Q09. 




Mr. Vivian stated at the Cowen conference in January that he expected to see a tick up in trends from business customers, which make up about 30% of tickets at the Bistro.  If trends start to get better on the margin, I think this name will continue to work.  Mr. Vivian guided to roughly flat revenues and margins in 2010.  Operating margin compares get more difficult in 1H10 as the company will be lapping its 100+ bps of improvement in 1H10, largely driven by cost saving initiatives.  Again, I think top-line trends will matter more to PFCB’s performance in the near-term.


PFCB will generate a lot of cash in 2009.  The company guided to $70 to $80 million in full-year free cash flow and I could see the company coming in slightly higher.  Mr. Vivian’s 2010 guidance assumes a “similar magnitude,” but I think free cash flow could come in better in 2010 as well.  The company has said it will continue to use this cash to pay down debt (expects to be completely paid down by mid-year 2010) and buy back shares.  On the 3Q09 earnings call, management said it expected its full-year share count to come down by 4% to 5% in 2009, which implies an increased level of share repurchase in the fourth quarter. 


2010 Outlook provided at the Cowen and Company Consumer Conference last month:

  • Development: 5 units each for Bistro and Pei Wei, modest growth.  There are currently 196 Bistros and the company thinks the concept has the potential for 250 units over time.  We could expect increased development in 2011 with closer to 8-10 new Bistro restaurants and 15-20 Pei Wei units.  And, we could see a few more in 2012. 
  • Same-Store Sales Growth: Even with the expected modest pick-up in sales trends out of its business customers, the company is not expecting positive comps for the full year in 2010 (maybe turning positive near the end of the year).  Specifically, modestly negative comps at the Bistro and positive comps at Pei Wei seem reasonable.  The company has no plans to raise prices in 2010, but Mr. Vivian stated that “If the world gets better, we might take advantage and take a little pricing.” 
  • Revenues:  Translates into roughly flat revenues in 2010. 
  • Restaurant level margins:  Roughly flat with 2009.  This assumption is based on the company’s current outlook for slightly favorable food costs offset by slightly unfavorable labor costs. Based on contracts in place, protein costs should be favorable over 2009. Produce is not contracted and has the same weight as chicken or beef, but assuming no plague, produce should be slightly favorable as well. 
  • Non-operating expenses: Preopening expense, interest expense and G&A are all expected to come down in 2010. 
  • Free cash flow: Free cash flow should be of similar magnitude to 2009.  Debt will be paid down by mid-year, which leaves about $40-$50 million available for share buybacks.  In general, he plans to clean up the balance sheet and take the share count down, which should put the company in good shape by year-end. 



In Jim Murren’s own words  MGM is “very determined to take Macau public.” The question is how much cash can MGM extract?  Unfortunately, it may be less than people think.



Unlike some of their peninsula peers, MGM Macau had a rough start when it opened in December 2007.  For the first seventeen months of operations, MGM struggled to generate a decent VIP book of business.  Its tables consistently and materially under earned almost all of their peers.  The rumors and reasons for underperformance were numerous:

  • Poor traffic access to the property and construction projects all around it
  • Over reliance on the “build it and they will come” belief
  • The property was mismanaged and MGM was too busy with its problems in Vegas and opening City Center… MGM did almost file for bankruptcy in 2009… according to our sources the papers were ready to file
  • Problems with Pansy Ho over who controls operations
  • There were rumors that Pansy was purposefully mismanaging the property so she can buyout MGM’s stake on the cheap (we think this rumor is false)
  • Not enough junkets at the property and poor marketing efforts


In May 2009 things began to change and the property seemingly hit its stride.  There were a host of management changes at the property level, new and additional junket operators where brought in, the market as a whole began to lap some easy y-o-y comps beginning in July.




In 3Q09, MGM Macau recorded Rolling Chip volumes that were 64% higher sequentially and 63% better than their 5 quarter average RC Volume.  The combination of explosive growth in VIP coupled with higher than normal hold, produced a blockbuster $73MM EBITDA quarter for the property compared to just $31MM of EBITDA in the 1H09 and $119MM of EBITDA for all of 2008.


The question is whether the results we saw in the 3rd quarter are sustainable?  We think so, to some extent.  There is the threat of more competition coming in the form of Wynn's Encore opening, a more aggressive SJM & ramp of Oceanus once the escalators open at the ferry terminal, and some potential pressure from Singapore.  Perhaps even greater than the competitive threats, are those of government tightening and general slowdown of growth in China and how that could impact the Macau market as a whole (see our note "MACAU VIP AND THE MACRO VARIABLES" published on 1/26/10). 


However, if we put market risks aside, the recent data coming from the property do suggest that the trends we saw in 3Q are continuing.  While MGM wasn’t as lucky (hold-wise) in 4Q09, junket RC for 4Q was flat sequentially.   We expect MGM Macau to report around $57MM of EBITDA for 4Q09.  Our proprietary January data for the property also supported that RC in the $3BN monthly range was sustainable, as January’s junket RC was $3.1BN - the best month for MGM Macau since opening.  If 3Q09 is the new normal for MGM Macau- at least in terms of RC volumes- then we think it’s reasonable to assume that MGM Macau can do $225-240MM of EBITDA in 2010 before MGM takes a royalty payment.


So what’s the right multiple to value MGM Macau? We would argue that MGM Macau should trade at a discount to where WYNN Macau and Sands China trade, since

  • MGM Macau is a JV – and hence prone to more control and operational issues,
  • Has less operating history, and the little it has has been inconsistent
  • Risk of market share shift to Cotai
  • No option on new property
  • Potential conflict with Pansy?


Using a range of 12-14x EBITDA on an Adjusted EBITDA number of $220MM (after 2% royalty fee), we estimate that MGM Macau equity value is worth $2.3-2.8BN.  In an IPO scenario with its 50% ownership, MGM would only generate maximum cash of $300MM assuming 25% is IPO’d.



R3: Sell It While You Can!


February 16, 2010


One of our key themes headed into 2010 was ‘sell it while you can,’ meaning that credit spreads, cash flow visibility, and the rebound in equities has created a brief window for bankers and P/E shops to get paid by bringing dogs to market. DG was first. Toys R Us is the poster child.





One of our key themes headed into 2010 was ‘sell it while you can,’ meaning that credit spreads, cash flow visibility, and the rebound in equities has created a brief window for bankers and P/E shops to get paid by bringing dogs to market. DG was first. Toys R Us is the poster child. We still think Sports Authority will be this year. Consider the following flow from this weekend…


1. According to the NY Post (they have the ‘exclusive’ based on their super duper secret sources), Bain Capital, Vornado, and KKR are currently interviewing investment banks to prepare an IPO for none other than Toys R Us.  Recall that the company went private for $6.6 billion about five years ago.  Timing on the deal is rumored to be this Summer.


2. Sports Authority is hitting the PR wagon about store openings and remodels. This smells like validation of our call that it will come public in a Dollar General-esque way. Short/Intermediate term, it is good for the space. Channel fill due to an inevitable (and untimely) but necessary store growth program in a concept that should not grow (or exist) takes the burden off vendors to pressure retailers for margin. On the margin, a negative for DKS. Net neutral for FL.


3. At least we’re getting some balance, as New Look, the UK based fashion chain, scrapped its IPO which was slated to take place next month.  Management cited “considerable volatility in the equity markets” as the reason for cancelling.  New Look was taken private in 2004 by sponsors Apax and Permira.


Why is this window dangerous? Aside from bringing businesses that should not exist back into the public’s hands and perpetuating a supply/demand imbalance at retail, it increases risk of being short business that should (and ultimately will) go away. Once the window starts to close on the margin, however, fundamentals will take on increasing importance. You listening JNY? WRC?



MORNING NEWS  (and Hedgeye Retail’s 2 Cents)


Fast Retailing & H&M Looking to Acquire - Fast Retailing Co. Chairman and Chief Executive Tadashi Yanai said the operator of Japanese retailer Uniqlo is on the hunt for acquisitions and plans to spend as much as $11 billion to strengthen its global presence. Mr. Yanai, who founded the purveyor of cheap-and-chic clothes in 1984, has made no secret of his ambitions to transform Uniqlo into the world's leading global apparel retailer, leapfrogging the likes of Gap Inc. and H&M operator Hennes & Mauritz AB. He said in an interview Thursday that acquisitions would be necessary, particularly in the U.S. and Europe, to reach that goal. <>

Hedgeye’s 2 Cents: A Japanese retailer – with a cost of borrowing near zero – is on the hunt for up to $11bn worth of deals. If that is not supportive of the point noted above as it relates to M&A, then I don’t know what is.


Payless ShoeSource Democratizes Runway Style for the Fall Season With the Unveiling of Designer Collections at New York Fashion Week - Unique Shoe and Handbag Designs Inspired by 1960s Parisian Women and Lunar and Earth Landscapes Hit the Runway at Designers' Shows -- Christian Siriano and Lela Rose. Fashion fans will be keeping a sharp eye on the runways this New York Fashion Week as the hottest upcoming looks for fall '10 are unveiled under the tents at Bryant Park, including the latest footwear trends from Payless designer labels: Christian Siriano for Payless and Lela Rose for Payless. Payless designer collections are among the most widely distributed designer footwear labels in America today.  The Payless fall '10 designer footwear and handbag collections will be available in stores in September with average price points under $40 an item.  In the meantime, shoppers can refresh their spring wardrobes with the spring '10 Payless designer lines including Lela Rose for Payless, alice + olivia for Payless, and Christian Siriano for Payless all available now in select Payless stores nationwide and  <>

Hedgeye’s 2 Cents: Whether you’d buy PSS designer product or not, the fact is that they finally have the speed to market and consumer insight to actually TRY this. I like it.


According to Comscore's annual digital year in review, Ecommerce sales were down for the first time in history after posting a 2% decline in 2009.  Sales for the year totaled $209.6 billion, with pure retail sales (ex-travel) coming in flat at $129.8 billion.  Travel declined by about 5% for the year, which was the key driver of the overall decline.  Despite a slow start to the year, holiday sales increased by 3% in November and 5% in December.

Hedgeye’s 2 Cents: I can’t bless the numbers, but directionally it is notable. Makes sense to me that travel dragged it down. Am I ready to throw in the towel and say that e-commerce is down w the big ramp. No. But it makes sense for the category/channel to revert to a growth rate of 2-3x total industry retail sales.


Report Finds E-Commerce an M&A Target - E-commerce proved the exception to the rule of contracting merger and acquisition activity in specialty retailing during the second half of 2009, according to a report from investment bank Tully & Holland. Improving economic conditions and continued tightness in the credit markets held off private equity-backed leveraged buyouts, leading to a temporary contraction in M&A activity, the report said. Nineteen transactions occurred in the second half of 2009, compared with 29 for the same period in 2008. “Retailers receiving funding generally operated in one of three segments — discount/value/off-price; health and wellness, or Internet retailing, all believed to have superior growth prospects,” the investment banking firm said. “Meanwhile, a still tepid mergers and acquisitions market saw multiple retailers, primarily in the multichannel and Internet segments, acquired by strategic buyers. <>

Hedgeye’s 2 Cents: Not new or surprising.


Wolverine World Wide, Inc. Announces $200 Million Share Repurchase Program - Wolverine World Wide, Inc. announced that its Board of Directors approved a new share repurchase program at its regularly scheduled meeting February 11, 2010, authorizing up to $200 million in share repurchases. The share repurchases are to be made over a four-year period at times and amounts deemed appropriate by the Company, based on a variety of factors including price and market conditions. Over the last 10 years, the Company has returned over $450 million to its shareholders through previously approved repurchase programs.  <>

Hedgeye’s 2 Cents: This is such a good little company. But not actionable today.


J. Crew to Open Fourth Men's Store - J. Crew is stepping on the accelerator to grow its men’s business. The retailer has signed a lease for its fourth men’s-only store in the New York area, WWD has learned, and is aggressively seeking locations for additional units outside Manhattan. “Someone needed to step in and give men clothes they could wear, love and collect,” said Millard “Mickey” Drexler, chief executive officer of J. Crew Group Inc. Saying the company is “becoming ambitious and opportunistic in our men’s business,” Drexler confirmed J. Crew will open a 3,400 square foot men’s store at 1040 Madison Avenue at 79th Street, across from a women’s store at 1035 Madison. The unit is expected to open in August or September. The store will join three others devoted exclusively to men’s product: a unit on West Broadway in TriBeCa, known as the Liquor Store because of its location in a former bar; one at 484 Broadway in SoHo, and the only mall location, at Garden State Plaza in Paramus, N.J.  <>

Hedgeye’s 2 Cents: Grow Mickey, grow! This could be a nice little tailwind, until he inevitably stuffs the channel again.


Eco-Summit to be Held at Nike Headquarters - Executives from Nike, Starbucks and other companies will join Oregon Representative Garett Brennan and labor leaders at Nike's headquarters on February 16 to advocate national climate and energy policies to create new jobs, restore America's competitiveness and provide for our economic and national security. Those attending included:

    * Sarah Severn, Director of Stakeholder Mobilization for NIKE, Inc.

    * Jim Hanna, Director, Environmental Impact, Starbucks Coffee Company

    * Mark Edlen, Managing Principal, Gerding Edlen

    * Chandra Brown, President, United Streetcar

    * Joe Esmonde, Renewable Energy Liaison, IBEW Local 48

    * Garett Brennan, Executive Director, Focus the Nation

    * Congressman Earl Blumenauer

The interactive panel discussion will be followed by a 20-minute tour of Nike's state-of-the-art green building, the C. Vivian Stringer Center, which embodies many of the carbon-cutting features on Nike's energy efficient campus. <>

Hedgeye’s 2 Cents: Think about how far this company has come. In the 90s it was the poster child for sweat shops (real or perceived). Now it is hosting eco summits, leading with Green footwear, and has consolidated largely into labor-friendly factories. Wall Street might not care, but this ultimately makes its way into the younger consumer’s mindset (and top line).


The Macau Metro Monitor, Februrary 16th, 2010



Wynn won a court action in Hong Kong against a high roller over a HK$30MM in gambling debt, this past Friday. The claim against high roller Henry Mong Hengli was for debts he ran up in Macau, although Wynn Las Vegas also filed a writ against Mong in Hong Kong for Nevada debts. Mong allegedly owes the company a total of US$6.75MM.

Mong’s lawyers argued that Macau law requires the Gaming Inspection and Co-ordination Bureau to individually approve credit agreements. Lawyers for Wynn said the Macau law in question doesn't apply to direct loans to players but rather credit agreements between casinos and VIP junkets, and that requiring casinos to seek gaming bureau approval every time they issue credit to players wasn't feasible.  This was the first case where a Macau casino operator attempted to recoup gambling debts through the courts in either Macau or Hong Kong. Macau passed its first legislation on gaming credit in 2004.


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