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Why we bought Turkey (TUR) yesterday

Position: Long Turkey via the etf TUR

 

The Turkish stock market flashed a negative divergence versus many European indices over the last days and we couldn’t explain the WHY behind the move. Then, yesterday, we got the rest of the story with news of the arrest of dozens of high-ranking Turkish military figures in what has been an ongoing investigation of suspects alleged to have plotted a coup against the government in 2003. The market had priced this in!

 

Taking a step back for context, 2003 marked the election year of current Prime Minister Recep Tayyip Erdogan and his Justice and Development Party, and his expedient end to the army’s control over the National Security Council. The latter point is an important and complex one to understand regarding the role of Turkey’s military in political rule, and it has significant precedence since the new Turkish state was founded by Mustafa Kemal Atatuerk in 1923. In fact, the military has ousted four governments since 1960, with the alleged 2003 coup meant to overthrow Erdogan’s government.

 

Certainly the political issues and tensions between a historically secular military and Erdogan’s current Islam-rooted government are complex. We’ll be grinding out more research on Turkey in the coming weeks, but our bullish take on Turkey is born out of a few positive catalysts: 

 

(1.)  The Istanbul Stock Exchange’s (ISE 100) recent tumble allowed us to buy Turkey via the etf TUR at a discount with TAIL line support down at 42,392 (see chart below).

 

(2.)  There’s huge upside to this emerging market economy with an improving GDP trend (see chart below). Annual Q1 GDP at -14.7% was a bottom and now in the rear view; we see favorable comps in 2010, and the government expects the economy to expand 3.5% this year, while the IMF forecast the EU and US to grow 1% and 2.7%, respectively, this year.

 

(3.) Turkey avoided an international bailout during the global recession after reducing its public debt to 47% of GDP last year from 67% in 2003 (Bloomberg). 

 

On the TAIL (3 years or less), bullish catalysts include: (1.) EU entry and increased trade; (2.) its powerful army—Turkey has the second largest standing army in NATO after the US Armed Forces; and, (3.) geographic benefit and influence resulting from its location between Europe and Asia, including energy transit. We’ll be writing on these topics in the coming weeks. Stay tuned.

 

 

Matthew Hedrick
Analyst

 

Why we bought Turkey (TUR) yesterday - t1

 

Why we bought Turkey (TUR) yesterday - t2

 

Why we bought Turkey (TUR) yesterday - t3

 


US Consumer, Steiner and Plutocracy

Per Josh Steiner (Hedgeye's Financials Analyst): "My word of the day is Plutocracy. The high end consumer is bouncing back much stronger than the low end.  The following is a chart from JPMorgan’s investor day (going on now) that shows the different levels of recovery in spending volume based on household income levels."

 

Per Wikipedia: "Plutocracy is rule by the wealthy, or power provided by wealth. In a plutocracy, the degree of economic inequality is high while the level of social mobility is low. This can apply to a multitude of government systems, as the key elements of plutocracy transcend and often occur concurrently with the features of those systems."

 

 

 

US Consumer, Steiner and Plutocracy - 2 25 2010 12 43 28 PM


HYATT 4Q09 CONF CALL "NOTES"

HYATT 4Q09 CONF CALL "NOTES"


"As to the economy and market conditions, we have started to see year-over-year increases in occupancy in a number of markets around the world. Having said this, the signs of economic recovery in the United States are mixed and our full service hotels around the world continue to face rate pressure. While these dynamics also apply in the select-service segment in the United States, Hyatt Place and Hyatt Summerfield Suites properties continue to expand their share of revenue in most of
their respective markets.”

- Mark S. Hoplamazian, President and CEO

 

HIGHLIGHTS FROM THE RELEASE

  • "Taking into account the current cyclical downturn, we believe that this is an opportune time to commit capital to renovations in our owned hotels and we will continue to do so in 2010 as we invest for the long term.”
  • "We expect to open more than 20 properties this year"
  • "Adjusted EBITDA increased by 85.7% in the fourth quarter of 2009 compared to the same period in 2008, largely due to a $16 million reduction in bad debt expense in the fourth quarter of 2009 compared to the same period in 2008."
  • "Bad debt expenses included in selling, general, and administrative expenses decreased $18 million in the fourth quarter of 2009 compared to the fourth quarter of 2008."
  • "Hyatt opened nine properties in the fourth quarter of 2009. During the fourth quarter of 2009, no properties were removed from the portfolio. During the full-year 2009, the Company opened 30 properties. Eight properties were removed from the portfolio during 2009."
  • "The Company expects to open a significant number of new properties in the future, the majority of which will be through management or franchising on behalf of third-party owners. This effort is underpinned by executed contracts for more than 120 hotels as of December 31, 2009 across all brands. Approximately 55% of the hotels are located internationally and 45% located in North America."
  • 2010 Guidance:
    • "Capital expenditures are expected to be in the range of $270 to $290 million, inclusive of broad-scope renovation projects at five owned properties. The Company anticipates that renovations at these properties will cause displacement beginning in July 2010, resulting from a reduction in daily room inventory of approximately 400 rooms on average per day during the second half of 2010"
    • Depreciation & Amortization: $285-295MM
    • Interest expense: $55-60MM

CONF CALL

  • Actions they take will from time to time negatively impact short term results in order to benefit the long run. Gave the 2010 renovations as an example
    • I wonder if they aren't alluding to a dilutive acquisition
  • 45% of their full service revenues comes from corporate and group business
  • Taking the Hyatt Place brand internationally starting in India
  • Started controlling and cutting costs in 3Q08, reduced comparable owned and leased hotel expenses by 4.4% y-o-y in 4Q09
  • Growth plan for management and franchise hotels
    • Most of their full service hotels will be managed
    • For international select service expansion they will do JV's where they invest equity
    • For domestic select service they will rely mostly on franchise
    • Realize that they can use their capital through financial participation of some kind or outright purchase to get into key gateway cities (for Full Service)
    • Focused on extending existing owner relationships
  • Pipeline represents 27,000 rooms, and 70% represent full service rooms
  • Capital application: Invest in new hotels, recycling capital by selling mature hotels and using the proceeds to buy new assets, investing in debt, acquiring fee simple properties and portfolio
    • Actively engaged at looking at several opportunities
  • Current trends:
    • Mixed signals in the US
    • Seeing some significant improvement in some emerging markets like China
    • Transient trends are showing improvement but rate is still under pressure
  • $1MM bad debt expense in the 4Q09 vs. $19MM in the 4Q08
  • 60% of adjusted EBITDA came from owned & leased, 15% came from international and franchising, 25% from NA mgmt & franchised
  • Demand is getting better but rates remain under pressure
  • Costs decreased at the hotel level due to lower staffing and lower food costs
    • Near the end of the runway for expense cuts
    • Recovery is expected to be occupancy driven in the 1H2010 and wages will be up - therefore margins will be under pressure
  • Transient occupancy in their management & franchised portfolio was up for the 3rd consecutive growth.  Group cancellations declined considerably though and that trend has continued into 2010
  • Starting to see a reduction in the rate of decline for group business, but there will be a lag before that translates into RevPAR growth
  • Rate of decline for RevPAR for select service has recently started to slow down materially
  • In 2009 they earned incentive fees from 35% of their full service hotels in NA
  • International business has started to show signs of recovery in local currency, 1/3 showed RevPAR growth
  • International fees increased primarily from an increase in incentive fees.  80% of their hotels paid incentive fees in 2009
  • Very focused on holding costs in line for SG&A but compensation expense will increase
  • Had $1.3BN in cash and $1.4BN of R/C capacity
  • $276MM of cash from operating activities was generated in 2009
  • 2010 Capex plans:
    • 4-5% maintenance capex as a % of owned revenues
    • Grand Hyatt NY & San Fran renovations will start in summer 2010 through 2Q 2011
  • Tax rate on US income of 38% and international income tax rate of about 20%
  • 1 pt of global RevPAR change = $10-20MM of adjusted EBITDA depending on mix of rate/occupancy and geography
  • Don't hedge FX, but don't expect a big impact for 2010

Q&A

  • Number of markets where they are working on expansion through mgmt & franchise arrangement and therefore don't need to apply capital.  Are more likely to apply capital in high barrier to entry markets in NA & Europe. Also remain focused on expanding their resort portfolio.
  • No target mix of owned vs managed mix
  • Dispositions?  Looking to structure transactions to support growth
  • Are focusing on conversion opportunities - and that is also where application of capital will matter
    • Potential to participate in recapitalization of a portfolio
  • How much capital is committed to the pipeline?  Only marginal bc its mostly managed and franchised
  • Other big projects in 2010?  Park Hyatt Chicago, Hyatt Regency in San Antonio and Atlanta
  • Churn commentary going forward?  Hard to predict, but historically they have been removals due to brand compliance and financial distress
  • Thinking about their capex - most of their 55 select service owned assets were conversions so they spent a lot of money on those.  The overall portfolio is in good shape
  • They did not mark up the tax basis on their assets during the IPO
  • The Waikiki asset is performing relatively well to service their loan. Don't believe that there is an impairment risk
  • They can avoid tax gains by contributing assets to a JV (may be able to do 1030 deals as well)
  • 25% of work force unionized (overall not just owned hotel work force - but its also roughly the same split for their owned portfolio)
  • Group business:
    • Group revenue in NA represents 45% of total revenue
    • Also a significant contributor to F&B
    • Have 9 hotels with over a 1,000 rooms
    • Mixed signals on group, overall business on the books for 2010 is lower than in 2009, however, the decline has began to be bridged since Oct 2009 (when bookings have begun to accelerate)
    • Rates remain down y-o-y both in the 4Q and continued into 2010
  • How is the international business really going to grow? How much of the international business is driven by domestic demand
    • It's not the only growth driver, as US recovers huge leverage there
    • Local demand for Chinese/Indian/etc is growing as a % of total business mix. Part of this is driven by the Chinese stimulis provided by the goverment
    • Most international hotel incentive fees start from a % take of the first dollar. Also margins from F&B internationally are also fairly high internationally
  • Of the 10 international hotels that they own. 1/3 of their total income comes from international.
  • Europe and the ME outperformed Asia in the 4Q09?
    • Correct - bulk of their portfolio saw RevPAR growth in Dec
    • Terrorist attacks in India caused significant disruption last year, and Chinese New Year shift also impacted them
  • Most of the opportunities they are seeing participating in recapitalization of assets and other structured transactions. Aren't seeing a pick up in fee simple transactions. They are deploying capital to development of their select service brands internationally.
  • How much of the fees are non-cash amortization of gains? Not a significant number. 

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R3: Earnings Callouts From a Diverse Group

R3: REQUIRED RETAIL READING

February 25, 2010

 

Last night and this morning have brought a wide range of earnings reports ranging from SWY to TRLG. A couple of callouts from the diverse group caught our eye.

 

TODAY’S CALL OUT

 

SWY

 

Headline earnings of $0.53 appear to be in-line with the Street, but below the surface continued topline weakness continues. Identical store-sales declined by 4.1%, meaningfully below the Street’s expectation for a 2.9% decrease. Bulls have been waiting for inflation to kick in at any time and so far signs of an inflation driven pick-up at retail remain elusive. We continue to believe the competitive environment will put a lid on opportunities to take prices higher, at least in the near-term. Also notable was the company’s decision to hold off on providing 2010 guidance until a March 3rd analyst meeting. We’re not sure what a few extra days will do at this point in helping to put forth an outlook for the coming year.

 

R3: Earnings Callouts From a Diverse Group  - SWY SIGMA

 

TRLG

 

Reported EPS of $0.59, $0.03 ahead of the Street on a better than expected topline. The key here in the near-term centers around investment spend over the first three quarters of the year and the company’s decision to curtail its off-price business. On the investment side, the build out of an internal salesforce, the opening of a Hong Kong office, and incremental ad spend are all taxes on earnings for the year. The off-price business is expected to be cut 25% or by $10 million, which still leaves a fair amount of product to be sold through that channel and the company’s own outlets. All in, management suggested that the entire years earnings growth will be driven by 4Q, or beginning in 8 months! Perhaps most troubling is that SG&A and gross margins continue to move higher in tandem, clearly leaving little upside and leverage despite the hyper unit growth of the company’s retail stores. We continue to see risk here as the business model remains in the midst of major (and costly) changes.

 

R3: Earnings Callouts From a Diverse Group  - TRLG SIGMA

 

KSS

 

Clean beat here this morning with EPS coming in at $1.40, above the recently guided range of $1.36-$1.37. Guidance is slightly below the Street with management citing a belief that the environment will remain challenging and they are not baking a pick up into the forecast. In other words, they continue to be conservative. It looks like 2010 will be a year in the which the company will continue to focus on market share gains by using some gross margin/inventory management benefits to further reinvest in price (which in turn drives share). The balance here between longer-term results and reinvestment at the expense of printing higher EPS in the near-term is notable and something that is expected to continue. Further introductions of exclusive product should also be both a source of competitive advantage as well as a source of gross margin gains.

 

R3: Earnings Callouts From a Diverse Group  - KSS SIGMA

 

 

Eric Levine

Director

 

 

LEVINE’S LOW DOWN 

  • Chico’s management indicated it has been using pop-up store locations for its Soma brand as a way to gage demand in a particular mall or trade area. The result of these tests has yielded about 8 or 9 longer-term lease signings, all of which are in freestanding mall locations. Soma stores will continue to be targeted primarily at A malls. 
  • For the first time in a year, Dollar Tree reported an increase in average ticket. While the company has been seeing positive traffic gains for some time, management believes that newer customers are returning to the store and buying more than they have on initial visits. The average ticket increased by 0.8%. 
  • In an effort to differentiate itself among other luxury retailers, Saks Fifth Avenue is seeking to secure exclusive lines with its designer partners. Exclusive product currently represents about 10% of sales, but is expected to double over the moderate term. 
  • TJX remains one of the few retailers looking to accelerate square footage growth over a multi-year period. The company grew square footage by 3% in 2009, and is planning on growing by 5% in 2010, and 5% in 2011. Based on current concepts and filling in existing markets, management believes the chain could expand from 2,700 to 4,200 locations over time. 
  • True Religion management indicated it is embarking on an effort to reduce the company’s sales to the off price channel. In 2009, the company sold approximately $40 million worth of product to off-price or about 13% of the company’s total sales. Given that this is a “luxury” denim brand that is still in growth mode, it’s interesting to see such a strong reliance on the discount channel as well as the brand’s own outlet stores. 

 

MORNING NEWS

 

GGP in Deal for Bankruptcy Exit - General Growth Properties Inc. said Wednesday that it reached a deal to emerge from bankruptcy with a $2.63 billion investment from Brookfield Asset Management Inc. The agreement with the Canadian property management company would split General Growth into two separate divisions and give Brookfield a 30 percent stake in the number-two U.S. mall operator. The deal comes after General Growth last week rejected an unsolicited $10 billion bid from its chief rival, Simon Property Group Inc. It is subject to bankruptcy court approval, as well as better offers in a court auction. Simon did not immediately comment. The Chicago-based real estate investment trust said the commitment would help it recapitalize at $15 a share and give unsecured creditors par value and accrued interest on their claims. General Growth said the agreement is not subject to due diligence or any financing condition. Under the proposed terms, shareholders would receive one share of new General Growth Properties common stock at $10 a share, plus one share of a new entity, General Growth Opportunities, at $5 a share. General Growth Properties would retain the core mall assets and General Growth Opportunities would own certain noncore assets, which the mall operator said would include its “master planned communities and landmark developments like South Street Seaport” in lower Manhattan. <wwd.com>

 

Walmart Canada to Open More Supercenters - Plans are in the works to open 35 to 40 more Walmart Supercenters in Canada this year. The new locations will be 10 percent smaller than current stores and will include both general merchandise and full supermarkets. The project, which includes new stores, relocations and expansions, will see an addition of up to 6,500 jobs in retail and construction. Start dates and specific store locations have not yet been announced. The new supercenters will bring Walmart Canada's operating total to 124. The retailer also has 200 general merchandise stores in the country. <licensemag.com>

 

Nine West launches a Facebook shopping tab - Nine West launched today a shopping application on its Facebook fan page that allows the company’s Facebook followers to buy products from designer Fred Allard's accessories line, as well as offers Facebook-only promotions such as 15% off purchases. The app, which was developed by technology firm Fluid Inc., is only accessible by Nine West Facebook fans. Limiting the app to fans gives its Facebook-related offers an air of exclusivity and should bolster the company’s fan base, says Andy Lloyd, Fluid CEO. Nine West fans who click on a “shop lookbook” tab on Facebook can shop, as well as note whether they “like” or want to “share” a product using the Flash-enabled app. When a shopper clicks the “like” button, that information is shared with everyone connected to her on Facebook. When she adds an item to her shopping bag a separate tab opens with Nine West’s standard checkout. Checkout occurs outside Facebook because Fluid and Jones Apparel Group, which owns Nine West, were concerned consumers would be hesitant to complete a transaction on Facebook, says Lloyd. <internetretailer.com>

 

Barnes & Noble CEO stakes the company’s future to e-commerce - Barnes & Noble Inc. sees the future and it’s clearly e-commerce. In fact with a burgeoning online business and aggressive new business development in the e-book reader market, Barnes & Noble is transforming itself from a conventional books retailer into a major e-commerce franchise, CEO Steve Riggio told Wall Street analysts on the company’s third quarter earnings call. While it didn’t break out specific numbers for its new e-book reader, Barnes & Noble Inc. nonetheless credits sales of nook with providing a spark in web sales for the third quarter of fiscal 2010. <internetretailer.com>

 

Amazon and Microsoft agree to share access to each other’s patent portfolio - Amazon.com Inc. and Microsoft Corp. have agreed to provide each other access to their patent portfolio, including the technology behind Amazon’s Kindle e-book reader, Microsoft announced yesterday. The agreement covers a broad range of products and technology, including the open source and proprietary software components supporting the Kindle and Amazon’s use of Linux-based web servers, Microsoft says. Microsoft did not identify which parts of its patent portfolio will be accessible to Amazon, which will pay Microsoft “an undisclosed amount of money under the agreement,” the software company says. A spokesman for Microsoft said that more specific terms of the agreement remain confidential. Amazon did not immediately return a request for comment. <internetretailer.com>

 

Crocs Wins Appeal in Patent Claims Over Copycat Shoes - Crocs Inc., the maker of colorful plastic clogs with holes, won an appeals court ruling that revived patent-infringement claims over what it considers copycat footwear. A U.S. appeals court sent the case back to the U.S. International Trade Commission in Washington for further proceedings. Crocs, based in Niwot, Colorado, can seek an order to prevent imports of rival Holeys, Dawgs and Waldies shoes made in Asia and brought to the U.S. The company originally filed an ITC complaint in 2006 against 11 companies. The only ones remaining in the case are Double Diamond Distribution Ltd., a company based in Saskatoon, Saskatchewan, that owns the company making Dawgs shoes; Holeys Canada Inc. in Vancouver; and Effervescent Inc. of Fitchburg, Massachusetts, maker of Waldies Comfy Clogs. <businessweek.com>

 

Industry Sees Pros and Cons in Jobs Bill - Apparel and retail groups said the $15 billion jobs bill passed by the Senate Wednesday is a step in the right direction, but criticized the legislation for failing to meet the immediate needs of their member companies to create new jobs. The bill would give a package of tax breaks to businesses that hire new workers and invest in new equipment. Democrats were able to break through the partisan morass on Capitol Hill and secure votes from Republicans to pass bipartisan legislation they hope will create tens of thousands of jobs and help revive the weakened economy. The vote was 70 to 28. The centerpiece of the legislation is a $13 billion provision that would offer an exemption from Social Security taxes to companies this year that hire new workers that have been unemployed for at least 60 days. Companies also would receive a $1,000 tax credit for each new worker that is retained for a full year. Employers would receive the credit in their 2011 income tax returns. Another provision in the bill would allow small businesses to immediately write off equipment purchases up to $250,000 as business expenses, as opposed to depreciating those costs over time.  <wwd.com>

 

Web-only retailers took the center stage for revenue growth in 2009 - With 35% of Top 500 retailers now breaking out annual web sales, it’s clear that web-only merchants took business away from the rest of the retail market in 2009, according to analysis of data for Internet Retailer’s forthcoming 2010 Top 500 Guide. Combined revenue for the 175 merchants that have reported annual web sales so far increased 13.8% to $49.70 billion in 2009 from $43.69 billion in 2008. However, among the 99 web-only retailers who have reported sales thus far, sales increased 25.2% to $32.45 billion from $25.92 billion in 2008. Even excluding growth powerhouse Amazon which grew 27.9% to $24.51 billion from $19.17 billion in 2008, the remaining 98 web-only retailers grew 17.6% to $7.94 billion from $6.75 billion.

The analysis of 99 web-only retailers, 36 chain retailers, 32 catalog companies and eight consumer brand manufacturers reveals:

  • Even though only a few consumer brand manufacturers have released e-commerce figures thus far, that group grew collective annual web sales by 12.7% to $487.6 million from $432.5 million in 2008.
  • Chain retailers’ web sales declined 3.7% in 2009 to $12.94 billion from $13.44 billion.
  • Catalogers posted a 2.6% decline in online revenue to $3.8 billion from $3.9 billion.

 <internetretailer.com


BKC – REAL TIME COMMENTS FROM TAST

Across the industry from MCD to MSSR chains are having to give up margin to mitigate the pressure on guest traffic.  In two decades as a restaurant analyst this trend has never been good news.  Today, things are different and it appears that traffic matters more than margin.  That is a difficult statement to make but for now getting people in the door matters most.

 

Below are comments on Burger King from the TAST conf call…

 

“Promotional tactics are centering around the consumer’s need for extreme affordability with very aggressive promotional activities as the QSR industries and its conventional customers have come under increasing pressure.”

 

“We are hopeful that Burger King adjust its discounting strategy and launches new products in 2010 these efforts will provide more balance to the brand barbell [ph] strategy.”

 

“This promotion [dollar double cheeseburger] which continues is certainly an aggressive discounting tactic intended to drive both top line and customer traffic. Although we're still selling a lot of doubles burgers, we have experienced a gradual tapering off from the initial levels.”

 

Relative to trends prior to the promotional activity from Burger King, there was some improvement in both sales and traffic.  However, these have been at the expense of some margin degradation given the inherent discount. 

 

Comparable sales for our Burger Kings in the fourth quarter were down 3%.  Our average check decreased 5.8% while customer traffic increased 2.1% for the quarter.

 

"BKC coined the term 'extreme affordability' but unfortunately, that has turned their Burger King core customers into 'extreme bargain seekers'"

 

 

OUTLOOK

  • Comparable stores sales for 1Q10 to-date are down more than 8% (although this is versus a tough +5% compare, they said trends remain soft, continuing trends from December)
  • TAST is closing 7 Burger King restaurants in 2010
  • Commodity costs expected to increase 3 or 4% for Burger King segment in 2010

CLAIMS ARE NOW CLEARLY GOING THE WRONG WAY

Initial unemployment claims rose 22k last week to 496k from 474k the week prior (revised up 1k). Consequently, the 4-week rolling claims number rose 6k to 473.8k from 467.8k.

 

This latest print pushes claims squarely outside our 3 standard deviation channel. For reference, our channel reflects the trajectory that's been in place since the March 2009 peak in claims. While we had been hesitant to call a reversal in the underlying improvement trajectory, the fact is that six weeks of data do make for a trend. On the margin, this is clearly bearish for companies with direct consumer credit exposure.

 

CLAIMS ARE NOW CLEARLY GOING THE WRONG WAY - 1

 

 

Joshua Steiner, CFA

Managing Director, Financials


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