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US STRATEGY - By the Charts

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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

Analyt

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

 


HYATT: THE FIRST Q OUT OF THE BOX

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

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 80.65%
  • SHORT SIGNALS 78.64%

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

Analyst

 

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.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bernanke Sees Inflation, Finally! - CPII

 


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