• run with the bulls

    get your first month

    of hedgeye free



Hoping for more disclosure.  Here is our preview.



Hyatt is scheduled to have its first earnings release as a public company this Thursday.  Results should look similar to HST’s, although Hyatt has a little less exposure to the convention business.  While we expect Hyatt to talk about the opportunity to grow its management and franchise business, especially in select service and international, most of its earnings still come from owned hotels.  Every other hotel company already told us that EBITDA for owned hotels will be down in 2010.  Hyatt should sing the same song.


We thought that the disclosure in the S1 filing was fairly poor, so hopefully there will be more detail this quarter and in the 10K filing.  We have no idea on how to model their substantial JV EBITDA.  To get to Hyatt’s “Adjusted EBITDA” we have to make some odd adjustments to calculated and historically reported segment EBITDA.


Anyway – below is our best guess of what results will look like this quarter, as well as our projections for 2010.


4Q09 Thoughts:

  • We project Hyatt to report $482MM of revenues (excluding pass-through revenues from managed properties) and $53MM of “Reported Consolidated Adjusted EBITDA”
  • Our EBITDA calculation excluding JV’s is $37MM (down 54% y-o-y).
  • We expect Owned & Leased Revenues of $438MM and  EBITDA of $31MM, driven by the assumptions below:
    • Full Service RevPAR down 9.5% and Select Service RevPAR down 12.5%, with 100% of the decrease driven by ADR
    • CostPAR (cost per occupied room) -6% (this compares to a decline of 6.7% decline in 3Q09 and a 2.1% decline in 1H09)
    • EBITDA margins down 630 bps for a margin of 12%, compared to a margin decline of 820 bps in 3Q09 and a 910 bps decline in 1H09
  • Management and Franchisee fees of $31MM and associated EBITDA of $25MM
  • A deduction of $25MM for corporate and other to get to “Consolidated Adjusted EBITDA”
  • Other assumptions:
    • Timeshare and other revenues of $13MM
    • Other direct costs of $6MM
    • SG&A of $53MM
    • D&A of $69MM
    • Interest expense of $8MM


2010 Outlook

  • We’re projecting EBITDA of $333MM for next year (on an as Reported Basis) compared to consensus of $352MM.  Consensus projections assume flat y-o-y EBITDA despite guidance from other lodging companies of another year of EBITDA declines in 2010 due to contracting margins.
  • We expect a similar outlook to HST, although Hyatt probably has a little convention exposure so RevPAR may be a little better in 1H09.
  • The company is likely to steer investor focus on growth opportunities given their:
    • underleveraged balance sheet and “coming” of distressed properties on the market … despite not seeing a lot of bargains “yet”
    •  “under-penetration”  of their brands especially on the select service side
      •  It’s hard to understand why companies equate under-penetration of their brands with demand> supply…that makes sense for huge networks where travelers accumulate significant loyalty points through work travel that they utilize for personal travel… but that “loyalty” traveler is a very small % of the total travelers for a company like Hyatt… and it’s hard to argue that the there is excess demand for hotels now.  Limited service is also going to be a tough sector to grow due the lack of credit available for construction
  • Since Hyatt has a smaller base of management and franchise business, given the law of small numbers, they may experience bigger growth in this segment of their business than other lodging peers but it still may not move the needle over the near term

The Week Ahead

The Economic Data calendar for the week of the 22nd of February through the 26th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2


Russia Ailing

Position: Short Russia via the etf RSX; Long US Dollar via UUP


Using a 2-factor macro model, commodity prices and Chinese demand continue to weigh on Russia. Additionally, on the domestic front, today we received two incremental data points: unemployment rose a full percentage point to 9.2% in January from the previous month and Bank Rossii cut the refinancing rate 25bps to 8.5%.


From this year’s high of 1580 on the Russian Trading System (RTSI) on 1/19/10, the Russian stock market is down 9.8% and broken from an intermediate TREND perspective (Note: the RSX is down 9.3% over this same period).


For the commodity-levered economy, the pullback in commodities and the underperformance of the Russian market rhyme with our Buck Breakout theme for Q1, a bullish call on the US Dollar (despite its immediate term overbought level today), which we’re long via the etf UUP in our model portfolio.  We also attribute this downward pressure from the recent economic tightening of China, Russia’s critical trade partner. (For more on our thesis on China, see our post “1Q10 THEME: Chinese Ox in a Box” from 1/13/10.)


Russia Ailing  - RUSS1


The move by the central bank today to lower the refinancing rate signals an effort to improve liquidity and lift the market; and the RTSI reacted favorably to the cut, closing up 1.2% after opening down this morning. Bank Rossii said there are no inflationary pressures, citing that inflation has come in every month since August ’09 to its current level of +8% (in English, we still call that inflation).


Yet with unemployment popping, we’d expect further crimping in domestic consumption to accompany Russia’s already bleak economic performance (GDP fell 7.9% in Q4 Y/Y). And if we’re right on our intermediate term TREND (3 months or more) bearish view of commodities, analysts’ predictions for 3% GDP expansion in Russia this year could fall short. 


Matthew Hedrick



Russia Ailing  - russ2


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%

Bernanke Sees Inflation, Finally!

There are plenty a market pundit making noise in the marketplace today that the “core inflation” report was benign. Most of those pundits have been US Dollar bears, interest rate doves, and need a reason to support their misplaced view that the Fed wouldn’t tighten this year. So take their narrative fallacy for what it’s worth.


Having been a buy-sider for most of my career, like you, I get the joke. Sell side strategists usually take a point of view and look for data points to support that view. They do not have a platform to change their “views” dynamically. Markets obviously move dynamically. So does your P&L.


Since the US Government has changed the calculation of inflation 9 times since 1996, we do not subscribe to the groupthink associated with taking the government’s word for it. Headline inflation doesn’t have the government sponsored adjustments like “core inflation” does. So we use headline.


Headline inflation is now running up +2.6% year-over-year growth as of this January report, and I think it will remain elevated well beyond any estimate coming out of Washington until at least August (that’s when we lap the low in the chart below of -2.1%).


Bernanke is tightening because he finally sees the inflation threat implied in this chart. It’s as plainly obvious as reported deflation was when the pundits were chasing the rabbit of the next Great Depression.



Keith R. McCullough
Chief Executive Officer


Bernanke Sees Inflation, Finally! - CPII



There’s nothing wrong with cashing out while the iron is hot, but with new issues being shelved by the day and at the same time the pipeline is building for offerings by other retailers, we wonder if this is already the beginning of a more pronounced slowdown in fundamentals and share price performance for Rue 21.



There’s no question that the hottest growth story in all of specialty retailing is recently IPO’d Rue 21.  Perhaps this is because it is also one of the only true unit growth stories in all of retail. Whether the company ever fully realizes its 1,500 store stated potential remains to be seen, but with a current base of 500 there appears to be plenty of runway ahead.  Now officially public for 3 months, the value priced fashion retailer catering to 11-17 year olds is prepping for its first secondary.  Private equity sponsor, Apax Partners, is the primary seller with 5 million shares expected to hit the market.  On the plus side, a slug of stock at this magnitude will nearly double the company’s float and likely provide some liquidity for the thinly traded shares whose volume is just averaging 128,000 shares/day.  On the flip side, the speed at which Apax is looking to exit its position is certainly worth noting.  There’s nothing wrong with cashing out while the iron is hot, but with new issues being shelved by the day and  at the same time the pipeline is building for offerings by other retailers, we wonder if this is already the beginning of a more pronounced slowdown in fundamentals and share price performance for Rue 21.


According to Hedgeye’s quantitative model, the shares have already broken the TRADE line of $29.21- not a good sign for the bulls. 


 RUE TAKE TWO - RUE 21 chart


From a fundamental standpoint, the company’s results out of the box have been nothing short of stellar.  Earnings for the holiday period were pre-announced to be 50% above Street estimates ($0.30 vs. $0.20 est.)  However, same-store sales did slow to a mid-single digit rate from 13.5% in 3Q.  Management was quick to point out that compares were tougher in 4Q.  Same store sales are slowing against tough compares, square footage growth is ramping up, and earnings are coming in substantially higher than expected.  This certainly sounds like a good time for some good old-fashioned risk management on the part of Apax, a.k.a taking money of the table.  From our risk management standpoint, this is setting up to be a short.  We cannot help but recall the company’s investor presentation from the ICR conference in California just about a month ago.   We suspect this will actually be recycled for the upcoming roadshow.  A recap of the notes from the conference reads:


The first five minutes were centered on the company’s recent IPO, strong share price performance, growth track record, and plan to dominate retailing like we’ve never seen before (we may be exaggerating, but not by much).  Key points from Rue (that are not made up):


  • When asked by the company’s pre-IPO investors if they were ready to go public, the CEO responded “Why not?”.  The entire IPO process was completed in 3 months!
  • On several occasions during the presentation, the CEO mentioned that Rue is the fastest growing retailer in the U.S.  With just over 500 stores, management now believes there is an opportunity for 1,500 stores! Prior expectations were for a 1,000. 
  • It’s all about speed.  Speed to market on merchandising through exclusive use of domestic resources and US based importers.  Speed to open stores, which only takes 6 weeks from signing a lease.  Speed to double the store base which should only take another 3.5 years. 
  • Finally, the CEO ended with “I’m proud to say our stock price is up 60% since the IPO and we’ve added $300 million to our market cap”.  Hmm…it seems clear what motivates these guys.


The timing here is key.  It’s probably best to let the dust settle on the secondary process and keep an eye out for the road show.  Management’s short history in the public eye suggests they’ll follow the deal with additional upside.  Both quarters out of the box have been blowouts to the upside.  However, nothing last forever, let alone industry leading growth driven by a value-priced, fashion merchandising strategy.  Ironically, RUE went public on the same day as Dollar General- two companies with value propositions and growth prospects bolstered by a weak economy, not an improving one.


Eric Levine


R3: NKE: The Catalyst Calendar is Building


February 19, 2010


Last night Nike sent out a ‘save the date’ notice for an analyst meeting in May for shareholders and analysts.  But of course word gets out at lightning speed to just about everybody (to far more people than can be accommodated). It’s gonna prove to be one of the more critical – and positive – events for Nike in a while.





As we’ve been saying for the better part of two months, Nike should emerge as a standout name in the Consumer space in 2010. Yes, some are bullish on the name. But I think it is still underloved and underappreciated by the Buy Side, and those that are on board on the Sell Side like it for the wrong reasons. Ultimately, both the magnitude and duration of an earnings recovery here – after 2 years of flattish earnings – will be far greater than the consensus thinks.


The calendar is shaping up nicely here. Olympic press is nice (though only a slight positive as most people don’t walk around the Street wearing Luge Unitards). Then we should see better order flow globally in advance of the 1) World Cup, and 2) more importantly – the benefits of Nike’s reorg last year, which went on offense in May. Count the 9-month product development/sales cycle forward from that point. Yes, we’ll see increased flow starting in Spring. We’re going to go through why – in detail – upon release of our next Black Book on Friday the 26th. Details including the dial-in and presentation will be sent to subscribers next week.


In the meantime, here’s a noteworthy chart to chew on. It shows the timing of Nike past analyst meetings vs. the stock. How can we forget that fateful meeting a decade ago when Nike dropped a bomb intra-meeting and the stock cratered. This was a different era for a different management team with financial reporting processes that were primitive relative to what it has since built. And in fact, check out how the stock performed subsequent to every other major analyst event.


Look out for our Black Book next week.


R3: NKE: The Catalyst Calendar is Building - NKE AnalystDays 2 10




  • Wal-Mart noted that its fourth quarter sales for the company’s ecommerce site increased by 30%. The growth rate is among the highest in all of retail for an established brand, including those that operate with an internet-only strategy. For the full year, walmart.com recorded 1 billion visits to its site. As a result, it’s no surprise that Wal-Mart is looking to accelerate the growth of its multi-channel capabilities around the world. 
  • Despite a still-weak topline, KSwiss is ramping up their marketing spend as the company looks to position itself as “The” California Sports Company. In 2010, marketing spend as a percentage of sales is now expected to reach all time high levels as the company launches and develops new products as well as looks to engage additional sponsorship and endorsement opportunities. This approach to a spending induced sales recovery effort puts the company in a very small group of companies that have gone on offense at a time where visibility on sales still remains very cloudy. 
  • Keep an eye out for the latest technology aimed at bridging the gap between online or virtual shopping and physical retailing. Watch company, Nooka, just released a video depicting augmented reality technology which “virtually” allows a consumer to try on a watch and see how it would look on his/her wrist. By placing a paper template, which looks like a watch, on your wrist and then using a webcam in conjunction with the company’s website, you are then able to “try on” any watch you’d like. The screen then displays, in real-time, your live image with a superimposed virtual watch on it. Trust us, it’s really cool. http://tinyurl.com/yzn5tur




GGP Declines Simon Offer - Bankrupt mall operator General Growth Properties Inc. said Thursday that it declined Simon Property Group Inc.’s $10 billion offer to purchase the firm. GGP chief executive officer Adam Metz said in a letter to David Simon, his counterpart at Simon, that “your objectives are not aligned with ours,” but added he hoped Simon would participate in the restructuring process getting under way. “As we have previously stated, our objective is to maximize value for the company and its stakeholders, and we are engaging in a process that is intended to accomplish that result in an expeditious manner,” Metz wrote. The move came a day after Simon urged serious talks between his firm, the nation’s largest mall operator, and its next biggest competitor. Simon declined to comment on GGP’s response.  <wwd.com>


Blackstone Said to Consider Joining Simon in General Growth Bid - Blackstone Group LP, the world’s largest private-equity firm, may join Simon Property Group Inc.’s bid to buy bankrupt General Growth Properties Inc., two people with knowledge of the discussions said yesterday. Blackstone is in preliminary talks with Simon, the biggest U.S. mall owner, said the people, who declined to be identified because the negotiations are private. Simon, which made a $10 billion takeover offer for General Growth public Feb. 16, would lead any resulting partnership, one of the people said. A collaboration with Blackstone would give Simon more “firepower” and may allow it to raise its offer after General Growth rebuffed it as too low, said Ben Yang, an analyst with Keefe, Bruyette & Woods in San Francisco. General Growth would consider a new bid if it was high enough, rather than moving forward with a plan to solicit more proposals, according to a person with knowledge of the Chicago-based company’s position. <bloomberg.com>


Adidas for Rent in Tokyo - Adidas is taking advantage of the increasing popularity of running among the Japanese and will open a new concept store, Adidas Runbase, here today. In addition to stocking Adidas clothing and shoes geared toward running, the shop will act as a base for runners in the city. Men and women will be able to rent shower and locker rooms for a fee of between 500 and 700 yen (about $5.50 to $7.70) a visit. The store also lends running shoes for 200 to 300 yen ($2.20 to $3.30) and clothing sets for 500 yen ($5.50). The store’s location is also unique, as it is not near any of Tokyo’s major shopping and retail areas. It is, however, just 1,000 yards from the grounds of the Imperial Palace, a popular running area in Tokyo. Runbase will be open from 7 a.m. to 10 p.m., making it ideal for government and office workers in the city who want to get in a run before or after work. Staff at the store will be able to help customers design their own pair of customized performance running shoes, which are tailored to the exact size and shape of each individual foot. Specialists also will hold running-themed workshops, clinics and events at least once a week.  <wwd.com>


Sears Begins Franchising Of Its Auto Centers - For the second time in a week, Sears Holdings Corp. (SHLD) said it is turning to outsiders to help expand its business as the company said Thursday that it is allowing franchisees to open Sears Auto Centers. Sears said it is offering auto dealers that recently lost their new-car franchises a new use for their space: Sears Auto Centers offering parts and services; over-the-counter merchandise; and previously owned vehicle sales. The franchises will have the same products and services available at about 850 locations. <wsj.com>


ASDA to Open Smaller Scale Stores - JPMorgan analysts say that ASDA, the U.K. arm of Walmart, intends to open 100 smaller format stores in the next three to five years, as well as 150 non-food stores, an acceleration of the roll out of its ASDA Living format. More plans are expected to be outlined soon, but it's believed that 75 percent of ASDA's growth will come from smaller stores, online and non-food.

The announcement is significant in the context of ASDA's previous experiments with smaller stores, which ended in it closing its George clothing stores and ASDA Essentials, which sold mostly own-brand goods. <licensemag.com>


Filene's Pays Creditors $41M - Filene’s Basement Inc., now known as FB Liquidating Estate, has paid out more than $41 million to its creditors, according to restructuring firm Abacus Advisors. Secured creditors have been paid in full, as holders of priority claims and convenience class claims have received their allowed payments and unsecured creditors have had 50 percent of their allowed claims paid. An initial distribution of dividend checks was completed Friday. Filene’s Basement filed for Chapter 11 protection on May 4 and was acquired by Syms Corp. June 18. <wwd.com>


U.S.-Made Apparel Prices Down Slightly in Jan. - Wholesale prices for U.S.-made apparel declined 0.1 percent in January compared with December and were flat in yearly comparisons, the Labor Department said Thursday in its Producer Price Index. Women’s domestic apparel prices declined 0.4 percent month-to-month and dropped 0.2 percent compared with a year earlier. Men’s apparel prices rose 0.5 percent in January and advanced 0.6 percent in 12-month comparisons. Prices for all goods and services increased a seasonally adjusted 1.4 percent in January, driven primarily by rising gas prices. In December, prices rose 0.4 percent and in November prices were up 1.5 percent. Brian Bethune, chief U.S. financial economist with IHS Global Insight, said price increases last month were “actually pretty tame given that January is a typical month to raise prices.” The PPI for apparel is not a true indicator of industry price fluctuations because of the relatively small number of manufacturers operating in the U.S. The Consumer Price Index, due out today, includes imports and is considered a more accurate barometer of pricing trends.  <wwd.com>


Weak U.K. retail data raise fears of double-dip recession - The heaviest snowfalls in decades and the rise in VAT caused havoc on the high street in January, forcing retail sales down sharply and raising the threat that the economy could slip back into recession in the first quarter. Sales volumes fell 1.2 per cent excluding petrol and diesel as parts of the country were brought to a standstill by snow early in the month. The rise in VAT back to 17.5 per cent after 13 months at a lower rate probably also contributed to reluctance to spend. The data, from the Office of National Statistics, echo private sector surveys from the British Retail Consortium and CBI reporting very weak sales in January. The BRC said it had been the worst January for retailers in 15 years. Including fuel, sales fell 1.8 per cent, the biggest drop in business on the high street since 1995, apart from an unusually volatile period in spring of 2008. “High street spending grew at relatively solid rates in the second half of last year and it would be no surprise if sales bounced back in the next month or two,” said Jonathan Loynes of Capital Economics. “At the very least, these numbers provide a very weak platform for sales in the first quarter of this year and therefore raise the chances that the economy may succumb to a double-dip.” <ft.com

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.