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Street estimates and management guidance look beatable. Relative valuation looks good.  If only we were sold on this economic recovery.



We’re not buyers of this economic rebound so the defensive MAR looks more attractive to us than most lodging stocks.  Unfortunately, MAR seems only to get relative respect in downturns.  MAR is trading at 10.5x our 2011 EV/EBITDA estimate despite generating 90% of gross profit from fees; 86% of those fees are derived from franchise and base management revenue streams.  As we’ve written about in the past, franchise fees and base management fees deserve a much higher multiple than volatile incentive fees although it doesn’t appear that the Street sees it that way.  Analysts seem perfectly willing to slap on a 14x multiple on total fees generated by HOT regardless of whether they are base, franchise, incentive, or even non-cash fees!  Still, we’d love to get MAR below 10x.


2Q2010 Detail


We’re ahead of the street for 2Q2010 and for the 2H2010 assuming current RevPAR trends continue into the back half.  Our projections are for MAR to print $275MM of EBITDA and $0.30 cents for the quarter, which correspond to 6% and 9% higher than consensus, respectively.  Here are the assumptions.



  • Worldwide RevPAR growth of 6.6%, with ADR flattish across the board but positive for some brands like Ritz Carlton
  • 5.4% YoY increase in system-wide rooms with a 2% increase in managed rooms and an 8.4% increase in franchised rooms
  • Total owned and leased revenue of $261MM and gross margin of $32MM
    • Ahead of the $25MM gross margin explicit in MAR’s guidance
    • We assume that the margin excluding branding and termination fees increases to 4.6%
  • Total fee income of $286MM which would be just above the high end of MAR's guidance
    • Management fees up 10% to $138MM
    • $40MM of incentive fees
    • Franchise fees of $107MM, up 15%
  • Timeshare segment results of $25MM and gross margins of $45MM, at the high end of company guidance
  • Other:
    • G&A of $150MM, in-line with guidance
    • Interest expense of $40MM and interest income of $5MM (below management guidance of $40MM, net)
    • 36% tax rate, in-line with guidance

R3: Revision’s Reality


July12, 2010





In just over a quarter, the world according to earnings revisions and earnings growth for retail, apparel, and footwear is looking like a dramatically different place.  For the first time since November 2008, our index of consensus EPS growth expectations has turned negative.  All the while, positive earnings revision trends have begun to erode along with the group’s multiple (currently just above 14X).  There’s no question that the focus has shifted to the second half, earnings guidance, and tough compares.  What’s most surprising however, is that Street estimates are already in the process of discounting lower earnings.  As such, those holding out on the long side with the “Isn’t everyone already aware of the tough comparisons?” mentality may have a point.


Unfortunately, what is not reflected here is an expectation for a measurable slowdown in the topline, which would render the negative EPS outlook to still be optimistic.  Even at a negative growth rate, things could surely get worse as multiples in the 10x-12x range back in early ’09 indicate.


 R3: Revision’s Reality - 1


R3: Revision’s Reality - 2 





- In an effort to juice city revenues, New York City’s Department of Consumer Affairs is cracking down on a law that prohibits retailers from leaving their doors open while blasting cold air. It turns out, the often used tactic in heavily shopped areas is technically illegal according to a law put in place in 2008. The law, which is clearly aimed at preventing retailers from being wasteful with the A/C (a.k.a energy), carries a $200 fine if violated.


- A report from luxury thinktank L2, sheds some light on the opportunities in China for luxury players. The report suggests that in three years, 840 million Chinese will be online, surpassing the entire online user base of the U.S, Europe, and Japan combined. More importantly, it is estimated that 80% of China’s luxury customers are 45 or below. The combination of the two demographics is sure to make a luxury players salivate, while at the same time adjust their go-to-market strategies beyond traditional high street locations and shop-in-shops.


- Whole Foods continues to the lead the organic and natural industry with its strict guidelines requiring suppliers to verify their product claims. This time, WFMI is requiring personal care and beauty suppliers to substantiate their “organic” claims via third party verification, beginning June 2011. The products will be required to meet the SAME standards as those set for organic foods under U.S law.





Sri Lanka Loses Duty Free Access to EU - Sri Lanka will lose duty free preferential access to the European Union from Aug. 15 for goods valued at 1.24 bn euros, or $1.5 billion at current exchange — of which the most affected are apparel items and fisheries products — following EU claims that Sri Lanka has failed to agree to a set of demands to improve its poor human rights record. EU member states initially decided on Feb. 15 to temporarily withdraw Sri Lanka’s lucrative Generalized System of Preferences tariff benefits, but had given the Asian nation six months to usher in the necessary reforms. The suspension of the GSP+ effectively means that, from Aug. 15, Sri Lankan exports that have benefited from duty free access under the scheme, such as some apparel products like T-shirts, would revert to the standard GSP tariffs, which for apparel is around 9 to 12 percent. <wwd.com/business-news>

Hedgeye Retail’s Take: A stiff blow to a country that is the 13th largest of origin for apparel imports to the U.S. While accounting for only 1.6% imports this will be a far greater issue for Sri Lanka as the U.S. shifts demand to more competitive countries.


Footwear M&A Pace to Quicken? - While consumers are still pinching pennies and looking for deals, footwear firms appear to be in the mood to spend. Mergers and acquisitions are on the rebound, as many footwear companies have built up liquidity on their balance sheets, said industry analysts. The industry is awash with cash after implementing heavy cost-cutting measures last year. Private equity firms are sitting on a lot of stagnant capital, while strategic buyers are seeking ways to plow back their excess funds. Analysts singled out cash-rich companies such as Nike Inc., Deckers Outdoor Corp. and Wolverine World Wide Inc. as being on the prowl for deals. Already this year, the value of global acquisitions of apparel manufacturers, as well as apparel and shoe, jewelry and department stores, jumped 133% to $11.28 bn , according to Dealogic. However, the total value of completed and announced global retail M&A deals is still well below the $29.09 bn seen at this same point in 2007, and no one expects to see that level of activity for some time. <wwd.com/footwear-news>

Hedgeye Retail’s Take: With the tax on capital gains expected to increase in 2011 and beyond coupled with what some refer to as excess cash, we expect activity to remain brisk for the balance of the year.


Rebound in Container Imports Expected to Slow - Import cargo volume at the nation’s major retail container ports is expected to be up 16% in July compared with the same month a year ago, but double-digit increases seen in recent months should taper offer this fall as retailers cautiously manage their inventories, according to the monthly Global Port Tracker report.  <sportsonesource.com/news>

Hedgeye Retail’s Take: With container traffic well above normalized levels YTD (15%+) and compares getting less favorable over the balance of the year this is to be expected, even in light of lean inventories still across much of retail.  


Hot Weather Sparks Sandal Sales - A record-breaking heat wave in the Northeast last week drove consumers into stores, giving a boost to footwear sales. Weather forecasting firm Planalytics Inc. tracked the impact on sandal sales for the week ended July 10, and sales in New York rose 19% compared with last year. When looking at the five-week period from May 30 to July 3, sales in the city were up 13%. Sandals and summer accessories are hot. Footwear retailers in outdoor malls could be negatively impacted because the hot temperatures are not conducive to leisure shopping. Not everyone benefits from the heat as running stores have fewer customers because no one runs in 100 degree temperatures and many people spend more time at the beach in hot weather. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  An end of season kicker to limit seasonal markdown activity.  Add this to the list with air conditioners and sunscreen.


Tariff Bill Would Provide Less Duty Relief for Outdoor Footwear - Outdoor footwear retailers and vendors got mixed news Thursday when the House Ways & Means Committee posted a Miscellaneous Tariff Bill that would restore duty relief on trail runners and other outdoor products retroactive to Jan. 1, 2010, but at higher rates than stipulated in the bill that expired last year. Congress had failed to renew the MTB last year, causing tariffs on rapidly growing categories of waterproof/breathable footwear to rise to the maximum 37.5%. Outdoor Industry Association (OIA) and the American Apparel and Footwear Association have been working ever since to have Congress revisit the legislation, which is typically renewed every two years. <sportsonesource.com>

Hedgeye Retail’s Take: Definite positive for the brands that have exposure here (i.e. TNF, NKE, etc.) as cost relief engenders pricing and margin flexibility in this strong sub-segment of footwear.


Management Changes at Macy's with Fashion Director and LVMH Japanese Chief - Macy’s Inc. has its fashion guru: Molly Langenstein has been promoted to executive vice president of fashion and new business development, establishing the Macy’s veteran as the department store chain’s first national fashion director. It’s the one top national slot Macy’s hasn’t filled since it centralized into a national chain from four divisions last year and seven divisions two years ago, and reorganized the top management with new assignments and titles. LVMH Moët Hennessy Louis Vuitton has tapped Frédéric Grangie, managing director of Goyard, as president and chief executive officer of Louis Vuitton’s Japanese subsidiary, effective Sept. 1. <wwd.com/business-news>

Hedgeye Retail’s Take: With the last position now filled, perhaps we will actually start seeing tangible results from Macy’s centralization efforts? With the hire coming internally for a position open since last year, something tells us this alone might not be the catalyst.


Lacoste To Launch Sub-brand - Clothing and footwear brand Lacoste will launch a new sub-brand in autumn aimed at a younger customer. <drapersonline.com>

Hedgeye Retail’s Take: Yet another retailer getting into the what is quickly becoming a crowded youth category as apparel retailers search for pockets of strength.


Ed Hardy Licensee Bows New Lines - Philip Chemla, owner of the Los Angeles-based Philip Simon Development Inc. footwear firm and longtime licensee for Ed Hardy shoes, is branching out beyond the brand’s signature sneaker look. For spring ’11, Chemla, who founded PSDI in 2002 and has created private-label footwear for Von Dutch and Hale Bob, is readying a line of his own and making moves to establish his company as a prominent industry player. The Philip Simon collection will start with 34 men’s and women’s styles. The women’s offering ranges from flip-flips to stilettos, with a selection of sneakers and casual looks for men. Priced between $39 and $200 at retail, the line is being targeted to major national department stores and larger retailers in the U.S. and across Europe and parts of Asia. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Classic example of a fashion apparel brand expanding into footwear, however this one could have legs given the brand’s strength.  Penetrating national department stores at the same time they’re significantly reducing vendors will likely prove to be the brands greatest challenge – perhaps more so than consumer demand.


Easton Sports Hires Branding Agency - Easton Sports has selected Agency 215 as its branding agency to generate national awareness and excitement for the brand and its sports equipment.  <sportsonesource.com>

Hedgeye Retail’s Take: …with M&A activity at heightened levels in the sports equipment market this reads as a concerted effort to gain visibility perhaps more with potential investors than consumers.


Comfort Trend: Perforations and Cutouts - Comfort brands are keeping things light and breezy, opening up spring looks with perforations and laser cutouts. These airy touches create a cooling effect, while providing plenty of coverage. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Now if could figure out a way to be long pedicures we’d be in good shape.


R3: Revision’s Reality - 3

What Information Is the Yield Curve Yielding?

Conclusion: The yield curve is a supportive data point in the Hedgeye Mosaic projecting slowing sequential growth.


We were interested to see the IMF raise global GDP growth forecasts last week.  The IMF is now expecting world growth to be 4.5%.  Collectively, the IMF is projecting 3.25% growth in the United States, 1% growth in the Euro region, Japan at 2.5%, and emerging economies at 6.75%.


Most interesting to us is that the IMF actually upped its forecasts for U.S. growth.  For 2010, the forecast for U.S. growth was revised up 0.2% to 3.3% and for 2011 U.S. GDP growth estimates were raised by 0.3% to 2.9%.  Given that U.S. GDP grew 2.7% in Q1, the IMF is actually suggesting that from its prior estimate, in April 2009, growth in the United States has been accelerating.  Needless to say, we are not seeing this same acceleration in economic growth.


In our Q2 Theme Call on July 1st, we actually went in print with our view of GDP growth for 2010, 2011, and 2012, which are 2.5%, 1.7%, and 1.7% respectively.  Obviously, the point of GDP estimates is to provide directional views, not precise numbers.  More specifically, the point of our estimate is simply that we expect growth domestically to slow sequentially in the coming quarters and years.


The foundation supporting our view is that debt and deficit issues will constrain the ability of the U.S. government to provide additional stimulus, and in fact may lead to some form of austerity.  Either lower government spending or an implementation of austerity, will lead to slower sequential growth over the coming quarters and years.


Interestingly, the yield curve seems to be predicting even lower GDP growth in the United States than Hedgeye.  According to recent paper from the Cleveland Federal Reserve:


“Since last month, the three-month rate has dropped to 0.09 percent (for the week ending June 18) from May’s 0.17, and this also comes in below April’s 0.16 percent. The ten-year rate dropped to 3.26 percent from May’s 3.33 percent, also down from April’s 3.85 percent. The slope increased a mere 1 basis point to 317 basis points, up from May’s 316 basis points, but still below April’s 369 basis points.


Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.00 percent rate over the next year, just up from May’s prediction of 0.98 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”


We’ve also attached a chart of the yield curve. Directionally the curve seems to be more supportive of the Hedgeye view of a sequential deceleration of growth versus the IMF’s view of a sequential acceleration.


Daryl G. Jones

Managing Director


What Information Is the Yield Curve Yielding? - 10Y 3M


The Macau Metro Monitor, July 12th, 2010


From April 26 to June 30, a total of 382 non-resident workers have received a six-month ban on working in Macau.  The law states that the six-month ban should only be applied to the cases of termination of labor contracts without just cause by the non-resident worker within the effective term of the contract.


Housing prices in 70 major cities rose 11.4% YoY in June, compared with 12.4% YoY growth in May.  June prices fell by 0.1% from May's, the first MoM decline since March last year, according to sources.


Chinese media reports have said a property tax could be imposed on a trial basis in Beijing, Shanghai, the southwestern mega-city of Chongqing and the southern city of Shenzhen.  



There is optimism that a casino bill may be passed in Spring 2011.  The prefectures that have expressed interest in building a casino include Tokyo, Okinawa, Nagasaki (the plan is to build one at the Huis Ten Bosch amusement park), Osaka, Wakayama, Kanagawa, Chiba, Miyagi, Akita and Hokkaido.


Toru Mihara, one of Japan's leading authorities on gambling law and casinos and an adviser to the current league of Diet members, believes that lawmakers are currently thinking of two casinos. "There will be a three-part process: 1) national government selects prefectures where casinos will be located. 2) those prefecture governments select private-sector operators via an open tender. 3)  The winning bidder will need to acquire a casino operating license from the national government — probably through a dedicated casino control authority set up under the Cabinet," said Mihara.


Mihara also said Okinawa may be an option to relieve some of the tension from the US military base relocation issue.  But Michael Leven, Sands' COO, has said, "We'd be interested in a place like Tokyo or Osaka.  If they were going to do it in Okinawa, we wouldn't be."  Mihara believes Konami and large-scale property developers may also bid for a domestic casino license.


Last week, 2 of the 8 risk measures registered positive readings on a week-over-week basis, while four were neutral and two were negative. 


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. MCDX Municipal Bond Credit Default Swaps

8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor – Swaps came in across the board last week.  AXP, WFC, and XL were the most improved, while only TRV had wider spreads week-over-week.  Conclusion: Positive.


Tightened the most vs last week: WFC, AXP, XL

Widened/Tightened the least vs last week: TRV, SLM, AGO

Tightened the most vs last month: AXP, ACE, XL

Widened/Tightened the least vs last month: SLM, LNC, PGR




2. High Yield (YTM) Monitor – High Yield rates dropped 11 bps last week. Rates closed the week at 8.95% down from 9.06% the week prior. Conclusion: Positive.




3. Leveraged Loan Index Monitor - The Leveraged Loan Index rose 2 points last week, closing at 1456 versus 1454 the week prior. Conclusion: Neutral.




4. TED Spread Monitor - Last week the TED Spread rose slightly, closing at 38 bps, up from 37 bps in the week prior. Conclusion: Neutral.




5. Journal of Commerce Commodity Price Index – The  JOC smoothed commodity price index is a useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index was down slightly, closing the week at 8.6, down just over 1 point versus last week’s close at 9.8. Conclusion: Neutral. 




6. Greek Bond Yields Monitor – Greek bonds yields and CDS continue to show turmoil in the Aegean. Last week yields rose modestly, ending the week at 1033 bps versus 1020 bps the prior week. Conclusion: Negative.




7. Markit MCDX Index Monitor – We are replacing the Markit ABX Index with the Markit MCDX Index, a measure of municipal credit default swaps.  We believe this index will be a useful indicator of pressure in state and local governments.  Each index is a basket of 50 municipal reference entities, both revenue and GO, and the chart displayed is the average of four indices with 5-year tenors.  After rising for much of the last month, it fell on Friday to book a decline for the week.  Spreads closed at 228 versus 252 a week ago. Conclusion: Neutral.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin vs last week, reaching its most bearish reading since the market bottom in March 2009. Bulls decreased by 3.8% to 20.9% while Bears rose 15.1% to 57.1%, pushing the spread to 36% bearish, versus 17% bearish the prior week.  Conclusion: Negative.


One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.





Joshua Steiner, CFA


Allison Kaptur


While volumes will not be as strong as Q1, Q2 should prove out our projection of an annual EBITDA run rate well north of S$1 billion.


We estimate that RWS will report S$665MM of revenues and S$272MM of EBITDA for Q2.  Obviously, there will be some slow down in daily volumes compared to Q1, and lower win per position as more positions opened.  Longer term we believe the Singapore market could easily grow at 10% a year for the next few years.  If and when junkets get licensed, VIP revenues should grow at a faster clip than Mass since there are no junkets operating in Singapore.  While some junkets may get licensed by Q3, they are likely to be the Singapore-based junkets and are unlikely to grow the market materially.  The hotels and the theme park should be positive EBITDA contributors this quarter, albeit at lower margins than the gaming operations as they are still ramping. 


We believe our Q2 estimates are above Street consensus.  Here is how we get to our numbers.


Modeling Assumptions:

  • Non-gaming revenues of S$97MM
    • Hotel
      • Average of 1,000 rooms operating at a rate of S$250 and occupancy of 70%
      • Assume that all 1,300 rooms are open by 4Q2010
    • Universal Studios
      • Spend per visitor of S$100 and 8k average daily visitors
      • Breakeven visitation of 6k/ day
      • Assume that by 4Q2010, daily average visitation increases to 12,000
  • Net gaming revenue of S$557MM
    • Slot revenue:  S$128MM
      • 1,200 slots and electronic table gaming positions at an average win per day of S$1,170
      • Assuming a 8% win rate, slot handle in 1Q2010 was S$871MM which we believe will increase to ~S$1,600 in 2Q2010
    • VIP Gross revenue of S$350MM
      • Rebate rate of 1.2% & net VIP win of S$209MM
      • Assume 3% hold, which implies that the first 46 days produced RC volume of S$6.35BN 
      • We assume that RC volume in 2Q2010 grows to S$11.6BN
      • Increased # of tables to 115 from 100 in 1Q2010
    • Mass table revenue of S$220MM
      • Assuming a 22% hold rate, 1Q2010 drop was roughly S$535MM and we assume that 2Q2010 drop will be about S$1BN
      • Increased number of operating tables to 235 from 200 in 1Q2010

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