News emerged today unveiling an agreement between BKC and SBUX to offer Seattle’s Best Coffee in approximately 7,250 Burger King restaurants across the United States by September 2010.  This is a positive for both companies.


On their last earnings call, SBUX made it clear that they saw growth potential in the Seattle’s Best Coffee brand.  Management stated that its research strongly suggested that SBUX had an “opportunity to position SBC with new customers” and that they “plan to create compelling franchising and distribution opportunities in 2010 and beyond”.  SBC is already in Subway restaurants.  Starbucks sees SBC as an opportunity to increase its overall share of the coffee market.  We believe that the partnership with Burger King will offer an effective vehicle for Starbucks to gain further traction in the market. 


BKC stands to gain from the agreement also.  For the second fiscal quarter, ended 12/31, Burger King’s traffic grew year-over-year in all day parts except breakfast.  In order to compete with McDonald’s during the breakfast day part, it has been clear that a premium coffee program would greatly aid that effort.  Serving SBC in Burger King is likely to have a positive impact on breakfast traffic.  It was reported that BKC will begin rolling out the coffee brand in the summer to better compete with MCD’s McCafe drinks and be nationwide by September.  During BKC’s most recent earnings call, management hinted at upcoming initiatives to address their breakfast offerings, “…we obviously have a lot of activity happening in our pipeline against breakfast. We do have upcoming in April, some breakfast value news that we will be advertising in the market.”  Whether or not there is more incremental news regarding Burger King’s breakfast menu, I view this news as a modest positive for the company.

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



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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.



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