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UA: Playing the Olympics Like a Champ

The Winter Olympics is traditionally a big blown-out non-event in the world of sports marketing. Yes, brands make noise about their innovations and new product. But let’s face some facts, most people don’t walk the Streets wearing those luge unitards.


Under Armour is the exception as it relates to brand impact, however. Why? Three of the many holes in its portfolio it has yet to fill are 1) International, 2) Higher-end cold weather outerwear, and 3) Women.  This event gave a lay-up opportunity to show the world that it’s not just a US football brand, and UA soared over a few defenders’ heads and jammed it.


Under Armour is taking full advantage of the 2010 Vancouver Winter Olympics through its official, unofficial, and individual sponsorships.  The ground work was laid in 2002 when UA joined the U.S. Ski Team as a supplier and has blossomed into high profile coverage through official sponsorships of the U.S. Freestyle Ski Team (aerials, moguls, and ski cross), U.S. Bobsled Team, U.S. Skeleton Team, and the Canadian Curling Teams (as an FYI, Curling in Canada is second only to Hockey as a National pastime). 


UA’s unofficial sponsorship can be seen underneath the outerwear with its performance base layers that are worn by most of the US athletes on the slopes.  If you’re watching the games, chances are that you noticed.  I’d argue that this trumps individual sponsorships in this instance. But Under Armour has also invested around cross-over athletes like Lindsey Vonn.  UA compared Vonn’s potential at the Winter Olympics of winning 5 gold medals to Michael Phelps amazing accomplishments of 8 gold medals at the 2008 Summer Games. That’s a bit of a stretch, but heck, UA endorsed Phelps last week last week, so even if they are wrong that still have the Big Man.  


Why Vonn and Phelps?  In the end, the athletes need to either win, but really, they need to capture the hearts and minds of viewers around the world. One of the more powerful ways to do this is by partnering with athletes with broad crossover appeal. By ‘crossover appeal’ I mean Vonn making it into the swimsuit issue of Sports Illustrated (see below), and Phelps endorsing UA’s product for purposes nothing having to do with water – but simply the training apparel/footwear to help him build form. This is also akin to someone like Maria Sharapova for Nike (who has been on the cover of SI and Vogue in the same month), where no one can justify the investment on tennis sales alone, but across a much broader product set.


Under Armour downplayed the impact of the Winter Olympics on their 4Q call and only mentioned it as a small opportunity to be seen as a global player. Our sense is that they fully baked this in to their SG&A guidance, but lowballed revenue opportunity as well as the longer-term brand implications.


See stats below for the market opportunity for UA in the Ski/Snowboard outerwear market. Its current share is sitting between 1-2%. Yes, that’s almost as small as its footwear market share. Big opportunity.


On a related note…Under Armour won the seventh Doc DesRoches Award (other winners include Rossignol, Spyder, and SmartWool) for recognition as an SIA member and U.S. Ski Team supplier for its promotion of the Team's brand and athletes. Under Armour was acknowledged for the national print and TV campaign around World Champion Lindsey Vonn. Check out the commercial: http://www.theskichannel.com/news/skinews/20100131/Lindsey-Vonn-Under-Armour-commercial-wins-Doc-DesRoches-Award-at-SIA.


Zach Brown


Hedgeye Retail 


UA: Playing the Olympics Like a Champ - Endorsements image 1


UA: Playing the Olympics Like a Champ - Endorsements image 2


UA: Playing the Olympics Like a Champ - Lindsey Vonn


UA: Playing the Olympics Like a Champ - Snow Market Size


UA: Playing the Olympics Like a Champ - US Winter Olympics UA Team


UA: Playing the Olympics Like a Champ - US Ski Team Website honoring UA


UA: Playing the Olympics Like a Champ - UA Webstie Image Shot



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


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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


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


Early Look

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