PFCB reported 4Q09 EPS of $0.52, blowing away both the street’s and my $0.40 per share estimate (and the company’s internal expectations).  Management attributed the better than expected earnings results to stronger than anticipated sales trends.  Same-store sales at the Bistro declined 5.2%, much better than the 8.5% decline in 3Q09; though trends still declined about 40 bps on a 2-year average basis.  Relative to industry market share, this sequential YOY improvement enabled the company to narrow its Gap to Knapp at the Bistro to -0.3% from -1.7% in 3Q09 (as shown in the chart below). 

Comparable store sales at Pei Wei increased 3% during the quarter, impressive in this environment and implied a 20 bp sequential improvement in trends on a 2-year average basis.  Management stated that traffic trends at both concepts were actually better than the comps indicated due to lower check averages.  To that end, Co-CEO Bert Vivian stated that comps should continue to get better as we trend through 2010 and he would expect average check to be less of a drag in 2010 than in 2009.


Outside of providing full-year 2010 EPS of $2.00 (relative to the street’s $1.92 estimate), management maintained its prior outlook of roughly flat revenues (slightly negative comps at the Bistro and slightly positive at Pei Wei) and flat restaurant level margins.  Some YOY favorability in preopening, interest and G&A expense should lead to slightly better pretax margins. 


PFCB may be experiencing some pressure today because despite this in line guidance, management cautioned investors that 1Q10 would be the low point of the year from an earnings standpoint with 2H10 expected to come in stronger than 1H10.  I also think investors would like to see the Bistro outperform the Knapp index, not just narrow the gap.  Looking at quarter-to-date trends, Mr. Vivian stated that weather is always an impact but that the company has gotten off to a slower start in the quarter due to weather.  In the first 6 weeks, when weather was not a factor, however, he said that PFCB saw a continuation of the improvement in trends seen throughout the fourth quarter.  The 53rd week in 2009, which was the week between Christmas and New Year’s Eve, is a high volume week for the company and produced average weekly sales of roughly $119,000 at the Bistro relative to the average of about $90,000 for all of 4Q09.  The benefit of this critical week in 4Q09 will be offset in 1Q10. 


Margins were helped in 2009, particularly at the Bistro, by the company’s operational initiatives, allowing the company to achieve near peak margins with comparable store sales down nearly 7% for the full year.  The company will continue to look for additional cost savings in 2010, but does not expect the same magnitude of savings as in 2009.  Comps are not expected to turn positive in 2010, but the Bistro will be well positioned to grow margins once demand returns.  A continuation of positive comps at Pei Wei will only further leverage the improvements the company has made at this concept.  Management attributed the higher average weekly sales at its Pei Wei class of 2009 openings to more disciplined real estate decisions.  In 2009, the company opened 7 Pei Wei units relative to 25 new units in 2008 and 37 units in 2007.  In 2010, I would expect to see another solid class of openings and improved unit returns as the company will continue to be selective as it is only planning to open 3-5 Pei Wei restaurants. 


PFCB’s cash flow story remains intact with the company expecting to generate about $90 in free cash flow in 2010 after about $40 million in capital spending.  Management plans to use this money, along with some cash on hand (ended the year with a cash balance of roughly $63 million), to pay down its $40 million credit facility and to repurchase about $40 million of shares.  Additionally, the company initiated a quarterly variable cash dividend, starting in 1Q10.  The amount of the cash dividend will be computed based on 45% of the Company's quarterly net income and is expected to total approximately $0.90 per share relating to fiscal 2010, or about $20 million of free cash flow, based on the company’s current EPS guidance of $2.00. 




Howard Penney

Managing Director

Risk Management Time: SP500 Levels, Refreshed...

Both our immediate and intermediate term risk management lines of resistance are starting to converge around the 1103 line. Most of the time when this occurs we are setting up for a period of increased volatility. Since there is plenty of immediate term upside in the VIX right now (up to 28.67), this is all starting to rhyme.


I am currently short the SP500 (SPY) right around today’s intraday price. So I’m positioned for what I think is going to be a test of the dotted green line in the chart below (the immediate term TRADE line of support = 1074).


The risk management question to ask is what happens if we breakdown through 1074 and close there? If it’s on accelerating volume and volatility studies, the answer (for the bulls) won’t be a pretty one. There is no other line of support in my macro model for the SP500 until 1048.


Immediate term macro calendar catalysts are hawkish. Both the PPI and CPI inflation reports for January are due out tomorrow and Friday morning, respectively.



Keith R. McCullough
Chief Executive Officer


Risk Management Time: SP500 Levels, Refreshed...  - spwas


The calendar shift of Chinese New Year into Feb could be the last of the positive catalysts for now. Feb may disappoint, the variables are in place to pop the VIP bubble, and margins could be pressured.



We have been bullish on Macau and the Macau stocks for some time now.  Unfortunately, the long list of positive catalysts have come and gone (almost).  No one knows what the near and intermediate term will bring but we’re paid to project, estimate and opine.  In our projection, estimation, and opinion, the set up does not look favorable.


The generally known and positive:

  • Q4 was terrific in Macau
  • January was huge
    • table revenue was up 63%
    • both Mass and VIP was strong
    • on average, $54 million in revs per day
  • LVS, WYNN, and MGM should all report strong Q4 EBITDA beginning tonight with LVS and make positive comments about Q1 so far
  • On the surface Feb looks to be a good month with Chinese New Year falling in Feb vs. Jan last year


The issues:

  • The VIP bubble – China has tightened twice, GDP is slowing, and liquidity and credit are not flowing like they have been.  As we showed in our post “MACAU VIP AND CHINA MACRO VARIABLES”, China economic factors explain an overwhelming percentage of changes in the VIP business.  The calendar shift of Chinese New Year may be masking a slowdown in VIP already occurring in February.
  • Initial read on February is disappointing – Our sources indicate that Macau may generate only 10bn MOP ($1.2bn) in table gaming revenues in February, up “only” 35% YoY, but a sequential slowdown from January’s 63% gain despite the Chinese New Year shift.  Moreover, if that number holds, revenue per day will have fallen from $54m to $44m sequentially.
  • Commission cap probably isn’t applicable to revenue share – This is allowing SJM to be very aggressive with junket pricing because most of their arrangements are on revenue share and not on turnover commission.  LVS, WYNN, and MGM’s Macau properties maintain a greater percentage of commission based arrangements which could be bad for market share as we move forward.
  • SJM aggressiveness – We are told that SJM is aggressively pursuing VIP market share at the expense of margins.  A large junket operator is getting 55% of revenue with volume incentives up to 57% to operate inside Grand Lisboa and absorb property expenses.  This is the highest revenue share in the market and indications are that SJM is looking for more of these relationships.  Specifically, they are targeting a number of Venetian junkets to move over to SJM properties.  Previously, SJM had been franchising out at this rate but this is the first time to our knowledge that they are offering this structure in house.


The problem for Macau and the stocks is that the positive catalysts are in the past and present but not the near term future.  These risks are real and imminent and should not be ignored by the investment community.  LVS reports tonight and MGM tomorrow morning but we’re not sure we’ll get a lot of color on these issues just yet.  Stay tuned.

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Exceptional Uncertainty

We’ve written on numerous occasions on the splintered leadership in the UK and the inability of the economy to show meaningful improvement over recent months. The most recent (lagging) data points suggest more of the same—high inflation and no improvement in unemployment while the economy drags off the bottom with a GDP reading of a mere + 0.1% in Q4 quarter-over-quarter.


UK CPI for January registered +3.5% year-over-year, up from 2.9% in December, and well above the target rate of 2%, with the components of transportation and energy as well as an increase in the VAT leading gains to the upside. (Note: PPI input prices rose 8.4% in January Y/Y). These inflationary levels can also be accounted for due to the deterioration of the Pound versus the USD and EURO a year ago.  Should the unemployment rate hold at this level, or even deteriorate, the set-up of increasing consumer and producer prices with meek growth is decidedly bearish.    


With the BOE voting to halt its 200 Billion Pound bond repurchasing program (ie quantitative easing through printing money), we’d expect macro fundamentals to pull back with the withdrawal of stimulus.   With the TREND line of the FTSE broken at 5284, the UK (via the etf EWU) will be one of the countries in Europe we’ll be considering on the short side. Stay tuned.


Matthew Hedrick


Exceptional Uncertainty - ukunempl

Death By A Thousand Paper Cuts

One of our key Macro TAIL (3 years or less) themes for Retail is the disintermediation of the West as it relates to its importance to global retail and sourcing. China unexpectedly handed us further validation for this game-changing theme.


‘Game changing’ theme? Don’t you think you’re being a little dramatic, McGough?   Hardly. Consider the facts. Here’s what we already knew…

  1. The consumer durable/non-durable brands and retailers in the US have come off of a 30-year cycle of scaling manufacturing out of the US, and into Asia, and to a lesser extent, Latin America. That’s hardly news to anyone. But an important consideration is that this offshoring/outsourcing was largely done with the US Dollar as the payment standard to foreign factories. With the US$ as the world’s reserve currency, this was the safest bet for all. But factories are beginning to accept payment in currencies that are not US$. That’s bad, really bad for companies that are not sophisticated enough to proactively manage this margin volatility – especially with the time lag between when an order is placed, and when the product ultimately arrives on a shelf for sale.
  2. Then, on January 1, we saw the implementation of AFTA, Asia’s equivalent of NAFTA where 4% import duties were eliminated between 16 nations to spur local consumption as a more profitable alternative than export to Western markets.
  3. Then yesterday, China pulled a surprise move and granted its first full factoring license to a London-based company called China Export Finance. Wy is this notable? Because it eliminates a step in the factoring process. Ordinarily, a Chinese factor working with a seller would have to collaborate with its counterpart in the West working for the buyer. Through China Export, the necessity for a Western Counterpart is mitigated. This would free up the Chinese vendor to sell its receivables to the trade finance firm, which would then make an advance payment to the vendor against the approval of a Western buyer. The buyer would then make payment directly to China Export when due.  Is this lone instance cause for alarm? No. But imagine if there were a thousand such licenses. Why can’t there be?


Our point here has not changed. In fact it is growing stronger as all this new evidence comes to the forefront. There are many different dynamics impacting the global supply chain. Any of these viewed in isolation is probably benign enough to slip right past the goalie without anyone noticing. But add ‘em all up and it definitely smells to me that generational shift we’ve seen in the manufacturing power base is at the end of its rope. The balance of power is swinging away from the West.


This is one of those themes that is probably irrelevant to near-term results. In fact, management teams won’t be talking about it, because I’d argue that over 90% of them don’t even know about it. This is something that will unfold over 1-2 years, and it will be clear who ‘gets it’ and who does not.


The longer-term winners are those that either have size, clout, pricing power AND a Macro process. NKE, UA, WMT, BBBY, RL, HBI an Li&Fung.

Losers will be those with no Macro process that are cruising by now on unsustainable margins due to lack of investment in content. JNY, DG, FDO, M, JCP, WRC, TRLG, and GIL.


Brian McGough




"While it appears that the economy has started to recover, we believe that several factors, including uncertainty in the strength and sustainability of the economic recovery and continued high unemployment, will continue to negatively affect lodging industry fundamentals in 2010. Additionally, the uncertainty in the economic climate and its effect on business and leisure travel, combined with shorter booking lead times, continue to inhibit the Company's ability to predict future operating results. However, assuming a decrease in comparable hotel RevPAR in the range of 0% to 5% for 2010, FFO per diluted share should be approximately $.57 to $.41 and Adjusted EBITDA should be approximately $750 million to $635 million."

Quick Thoughts on the Quarter

Despite weak revenues, HST 4Q09 Adjusted EBITDA blew away expectations when adjusting for the $41MM accrual of a potential litigation loss.  


As we expected RevPAR came in above the high end of their guidance range, but F&B and other revenues suffered greater declines then we anticipated based on the HOT & MAR’s results which both showed material, sequential improvement in these two categories. 


However, the real surprise was on the cost side.  HST specifically guided to adjusted property level margins suffering their worse decline of the year.


“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.”


We suspected that they were being conservative and therefore assumed that they would beat the street, however, it’s unusual that the guidance on margins would be off by 300+ bps for the coming quarter.   In fact, HST had the lowest margin decline of the year, with Adjusted EBITDA margins only down 490 bps compared to a 790bps decline last quarter.  Expense management was better across every category, (room, F&B, hotel departmental and other property). The magnitude of the margin beat relative to guidance suggests that 2010 guidance is also likely conservative. 



  • F&B declined as a reduction in banquet business in the quarter
  • Overall the favorable trends they experienced in the 3Q accelerated into the 4Q, driven by transient demand
  • Short term bookings continued to improve, albeit at lower rates
  • Transient room nights increased 7% y-o-y in the quarter and were up 1% compared to 2007. Increase in transient occupancy was due to more discounts. Rate continued to be a challenge as the average transient rate declined over 15%. Overall transient RevPAR down 9.9%. Expect transient occupancy up in 2009 but rate may be down
  • Improvement in group activity for the quarter as net group bookings in the quarter were 90% higher than 2009.  Attrition and cancellation rates are reverting to historical norms.  Groups ADR was down 9% but overall RevPAR was down over 20%
  • Group bookings now for 2010 are 5-6% lower than this time last year. However, they expect that short term booking will make up a lot of this gap but rates will be lower on group than transient next year
  • Sold the Doubletree for 9MM in the 4Q09
  • No dispositions are included in guidance although they will market a few assets
  • Very few assets are really coming to market, bulk of activity is occurring with properties encumbered by securitized debt.  They are pursing a few of those opportunities.  Don't expect deal flow to accelerate until late 2010 or 2011.  Fairly confident that they will acquire assets this year, including debt instruments, but none are included in guidance
  • ROI projects was $35MM in quarter
  • Outlook for 2010:
    • Pace of recovery expected to be slow
    • Beginning of this year, rate is trending down 10% y-o-y so far
  • Will be aggressively looking for acquisition opportunities both domestically and internationally
  • New Orleans RevPAR was their strongest quarter - up over 13%
  • Tampa RevPAR only decreased 3% due to some sporting events (ADR declined 11%)
  • DC Metro rates fell 8% (RevPAR down 5.3%)
  • Boston rates fell 10.1%
  • San Fran fell 12.3%, occupancy up 210 bps while rates fell 14%
  • New York RevPAR declined 13.4%, international and domestic travel drew better than expected results
  • Phoenix and Houston were the 2 worst markets. Phoenix continues to suffer from over supply and weak economy.  Houston had difficult comps
  • Miami Ft Lauderdale expected to perform really well (super bowl & renovations)
  • Boston expected to be strong in 2010 due to renovations
  • NYC should also outperform
  • San Fran should perform well (Ball room renovation will negatively impact 1Q2010 but will be a benefit for the rest of the year
  • Phoenix is expected to be an underperformer
  • Hawaii will continue to be challenged due to lack of flights and their hotels will be undergoing room renovations
  • San Diego room renovation will also negatively impact them
  • Expected European JV RevPAR to be +2 to -2% in 2010
  • Profit flowthrough at the room level was better than expected due to more cost cuts and increased productivity
  • Wages and benefits decreased by 10%
  • Utilities down 9.7% due to lower usage and lower rates
  • Unallocated costs down 7.5%
  • Real Estate Taxes down (5%?) and insurance up 1+%
  • For 2010-- expect occupancy to increase, leading to an increase in wage and benefit costs but at a pace less than inflation, and unallocated costs to increase less than inflation. Property taxes to rise in excess of inflation and insurance to increase at inflation. Utilities will increase more than inflation due to colder winter
  • Have $1.2BN of cash and cash equivalents and 99 assets that are unencumbered by debt


  • Property tax increase in 2010?
    • Property taxes dropped in the 4Q09 because they were successful in some of their appeals to municipalities. In 2010 they will continue to appeal tax increases but they can't assume lower taxes unless they win the appeals.
  • Group bookings pace trend throughout the 4Q and into 1Q2010
    • No signs that booking window is lengthening yet
    • Bulk of the business booked in the 30-60 day window
    • When occupancy improves, booking window will lengthen
  • ATM program (their stock issuance program)
    • It's HST's primary method of funding acquisitions and projects
    • They feel good from a balance sheet perspective now
    • Don't expect to be issuing equity at the same pace as last year unless acquisition activity really picks up
    • Don't need a new program right now either
  • Debt investments?
    • Interested in buying securities that would get them mid-teens or higher returns or are a way of getting at the assets through the foreclosure process
  • Why did they issue so much equity when there are no imminent acquisitions
    • Usual acquisition is $100-300MM in size so the amount of capital they raised really isn't that big
  • 37-38% of their mix is Group - so they are more overweight in convention business then MAR & HOT.  So if they underperform it's because of group bookings.  Group is typically 42-43% of their bookings in normal times.
  • Santa Fe, Denver and New York are some of the markets with the most supply growth coming. However, they feel really good about NY being able to absorb that supply.  NY had 90% occupancy in the 4Q.  That's a market that could surprise to the upside in 2010 if there is any pick up in corporate travel
  • Group bookings for 2010- rate looks like they are running about 5% below 2009 level
  • How big is the acquisition pipeline that they are looking at?
    • On the debt side there are more opportunities - more than a few
    • On the fee simple side, just not seeing much
  • Realistically 1 cent quarterly dividend should be all they need to payout in 2010, unless they do dispositions with any capital gains, then they will need a special dividend
  • Secured debt markets have strengthened with 6.5-7.5% rates and 55% LTVs
  • How much of the capex guidance in 2010 is maintenance vs. ROI?
    • 15% of it is ROI producing, rest is maintenance
  • How are Ritz-Carltons performing?
    • Luxury did better than it had done in the first three quarters of the year. As they got to Dec & Jan, they saw that segment outperform the rest of the company due to timing (given how bad last year was). Expecting that luxury will do a little better than the rest of the portfolio. Ritz-Carltons in Florida are expecting positive RevPAR in 2010
    • Not a lot of farther out bookings at their Ritz & FS hotels

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