MAR should beat Q3 consensus next week. We remain concerned about the recent sequential slowdown in seasonally adjusted RevPAR, however.


Q3 may be the last quarter where earnings should be easily beatable for lodging companies.  We are projecting MAR to report $0.24 of EPS and $242MM of EBITDA, exceeding guidance and beating consensus numbers handily.  However, we do expect guidance to remain unchanged.  At $0.34, our Q4 estimate is $0.02 below the Street, which should be in-line with management’s unchanged 2010 guidance.


Our projections are based on recent absolute dollar RevPAR, adjusted for seasonality and GDP growth.  We’ve seen a seasonally adjusted sequential slowdown in RevPAR since the “pent up” period of May-July.  Based on this analysis, we think industry upper upscale RevPAR growth will be only in the 3-4% range in 2011.  Q1 2011 should be strong but Q2 and Q3 may be in the 0-2% range, owing to the difficult comparisons.  For MAR, our 2011 EPS estimate of $1.29 remains below the Street's $1.39.



3Q2010 Detail

  • WWW RevPAR of 8%, at the high end of company guidance (6-8%)
  • Total Owned, Leased, Corporate Housing and Other Revenue of $236MM and gross margin of $16MM – above guidance of $10MM
    • Includes $19MM of branding fees, and $2MM of termination fees
    • $95MM of owned & leased room revenues, up 9.4% YoY
    • 5% increase in food, beverage and other revenues
  • Total fee revenue of $263MM, compared to guidance of $245-255MM
    • Base management fees of $127MM, up 9% YoY
    • Incentive fees of $29MM, up 30% YoY
    • Franchise fees of $114MM, up 14% YoY
  • Timeshare segment results of $34MM, at the upper end of guidance ($30-34MM)
    • Contract sales of $184MM
    • $52MM gross margins on timeshare sales and services, net
  • Other stuff:
    • G&A: $150MM compared to guidance of $155MM (easy place to build in some cushion)
    • $5MM of gain and other income – in line with guidance
    • $39MM of net interest income, $1MM below guidance
    • A loss of $3MM for equity earnings


The Macau Metro Monitor, September 30th 2010


Singapore's Casino Regulatory Authority (CRA) said it has received license applications from junket operators endorsed by Resorts World Sentosa.  There was no information on the number of applicants or when licenses will be granted.



As Golden Week approaches, surveys show hotel room rates up 10-15% YoY.  For the first two weeks in October, hotel occupancy rate will exceed over 90%.



Not to repeat the chaos that erupted from Galaxy's previous recruitment fair in March, the Labour Affairs Bureau (DSAL) will coordinate with Galaxy regarding the job interview arrangements for Galaxy Macau.  Galaxy has started to advertise in local newspapers and also launched a career website.  However, director of the DSAL, Shuen Ka Hung told reporters that the bureau had not yet received a notification from Galaxy about staging a mass recruitment drive or the date of the event.



China's government has canceled certain property tax breaks. The reduced real-estate transaction tax of 1% will no longer apply to individual first-home buyers if their family members already own one or more homes.  To stem speculation, the government also canceled individual income tax breaks for those who buy a new home less than one year after selling a home.

The Incorrigible Hand

“A government big enough to give you everything you want is a government big enough to take from you everything you have.”
-Gerald Ford [Address to a Joint Session of Congress - August 12, 1974]


In yesterday’s Early Look, Keith said “I haven’t considered a heightening probability of a US stock market crash in an Early Look note since 2008.”  After reading that all I could think about was 1987 and a very difficult Friday in October.  We have five Fridays in October this year and I, for one, am concerned about all of them!


The current backdrop:


First catalyst - The Incorrigible Hand:

  • A financial bubble fueled by easy money and loose credit bursts  
  • Unemployment rises and GDP growth slows 
  • The misguided in Washington blame foreigners for unfair trade practices and pass a trade bill   
  • Thus sending the country into further economic weakness

Some elder Americans have seen this movie before.  The rest of us can read about it.  The fragile state of our economy, which the data is speaking to daily, is not lost on Main Street America.  In Washington, politicians are posturing accordingly.  Schumer and friends are spitting fire about China’s “economically injurious behavior” and the need for action against the “currency manipulators” in the form of a trade tariff on Chinese imports.  Look no further than the Smoot-Hawley tariff act of 1930 for an example of what such action may result in for this country.  Despite a petition signed by over one thousand economists requesting a presidential veto, this law was signed into effect and many believe exacerbated the Great Depression.


Yesterday, the House of Representatives passed H.R. 2378 or the Currency Reform for Fair Trade Act.  If it becomes law this year (which is unlikely given the mid-terms and that the Senate is only in session for a few more days), the bill would give the Obama administration the power to raise tariffs on imports if the Commerce Department determines that an exporting country is manipulating its currency.


The refusal to yield to common sense on the part of those pushing this bill is beyond belief; you can’t make this stuff up.  The CBO released a report showing that the new tariffs would raise only $20 million versus the billions in trade we do with the Chinese.  Thinking we can legislate the YUAN higher is just lunacy.


Second catalyst - the Financials are at risk:


According to our Financials analyst Josh Steiner, certain Financials are setting up to be a great short.  In his note yesterday he said “this is the third time this year that we've written a note on high yield and its relationship/implications for the XLF. High Yield is knocking on the door of its YTD highs once again; the index peaked at 8.19% on April 29th, 8.28% on August 3rd and closed two days ago (September 27) at 8.24%. Following those first two peaks in high yield, XLF dropped 18% and 10%, respectively over durations of 64 and 23 days.“


Third catalyst - the cost of bailing out the European mess is on the rise:


Europe’s woes continue, whether the eyes of the manic media are focused on them or not.  Ireland’s government has injected 30 billion euro into Anglo Irish Bank since January 2009 and estimates that 11.4 billion euro in additional liquidity may be required.  Another lender, Allied Irish Bank, is also set to receive government funding bringing the total cost of Ireland’s bank bailout to as much as 50 billion euro ($68 billion).  In addition, the country's budget deficit will balloon to 32% of GDP this year.


Fourth catalyst - Fridays ISM print:


Once again, we are looking at a Friday in October as bonds signal trouble and stocks levitate.  I understand that the economic backdrop of the crash in October 1987 was very different, but it’s still all about interest rates, the dollar and budget deficits.  This time, the “emergency” level of rates is not helping to stimulate the economy as intended. 


Tomorrow the ISM manufacturing index for September will be reported.  The August reading of 56.3 posted a big upside surprise versus expectations of 52.8, setting off a 9.09% rally in the S&P 500.  Since then, Factory orders, ISM non-manufacturing, Empire Manufacturing, Philadelphia Fed, Chicago Fed and the Dallas Fed have all reported disappointing numbers relative to expectations.  All of the regional FED readings, except the Empire State manufacturing reading, are showing September numbers that imply economic contraction, not expansion. A reading below 50 on the ISM is in play for the first Friday in October.


We believe that the fundamentals are pointing to the downside and the catalysts outlined above highlight some key risks to be aware of.  With many close races in the November elections, pointing fingers at others is the favored position in D.C. Rest assured, government’s Incorrigible Hand will be in action.  There are historical precedents for this kind of policy.  Looking at a more contemporary cautionary tale, Japan, is also instructive.  We will be exploring the lessons to be learned from Japan’s experience next Tuesday, October 5th when the Hedgeye Macro team hosts the 4Q10 Macro Themes conference call (email if you are interested in the call).  The three themes are:


(1)    Japan’s Jugular  - Japan got rocked last night, down 1.99%, now down 11.6% YTD.

(2)    Krugman’s Kryptonite - comparing our Japan conclusions to academic dogma about debt financed deficit “stimulus”, and deconstructing  Paul Krugman’s math.

(3)    Consumption  Cannonball  - The Incorrigible Hand strikes again!


Function in disaster; finish in style


Howard Penney


The Incorrigible Hand - obama schumer

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LIZ: Why We’re Liking It

It’s tough to find long ideas in retail today where the sheer force of company-specific initiatives can offset the cross currents of Macro and the Global Supply chain to take estimates above current expectations. LIZ is emerging as one of them.


Some points to consider. First off…look at the chart below. Former CEO Paul Charron saw what was coming down the pike. After having successfully rolled up a whole host of branded apparel companies and always looking like the good guy b/c he was perennially compared to Jones Apparel Group (JNY), Charron cashed out in 2006 with his stock in the low $40s.  Enter Bill McComb – who arguably did not know what he was getting himself into.


We could dedicate a few thousand words alone to what allowed Charron to build his empire, and why the environment changed after McComb took the helm. But it won’t change one major factor – that the stock is sitting at six bucks.


It’s easy to see why given the earnings revision chart below.


LIZ: Why We’re Liking It - LIZ Earnings Revisions in McComb Admin


The bottom line here is that we think that revisions are starting to turn positive again.

The Street’s 3Q number of break-even EPS seems about right. But in 4Q, the consensus numbers look low by about a third. For the next two years we’re commin’ in hot at $0.84 and $1.34. That compares to the Street at $0.30 and $0.80, respectively.


There are a few main drivers.

1)      LIZ is finally coming off a 3-year period where it…

  1. First royally crossed its largest customer and the largest department store in the world (Macy’s for those that don’t cover the space).
  2. Prepared to ramp in an exclusive arrangement to sell into JC Penney with its core LIZ Claiborne Brand – which caused additional friction in the channel.
  3. Launched a new model to sell consumer-direct on QVC.
  4. These are great ideas, as they reduce margin volatility while taking working capital out of the business at a time when the market often reverts into a mode where it thinks LIZ is going away. This deal helps both the income statement and balance sheet.  Mind you…while this transformation took place, it took away $500mm in revenue on a sales base that today stands at just $2.6bn. That’s about $3.90 per share after tax.
  5. This erosion is OVER. See earnings revision chart above once again.

2)      Mexx is another business LIZ owns that has been just awful.

  1. Once upon a time, this was a $1.2bn brand. Now it is losing money at $750mm.  One of the issues at Mexx is that the company in effect ‘fired’ their customer. They tightened the customer range, and went chic metrosexual (that’s the first and last time you’ll see that in a McGough note). They had all eggs in one basket with Li&Fung, who chinced on quality of materials. Overall, the consumer had very little reason to shop there.
  2. My Canadian friends and colleagues are gonna give me crap for bringing this up, but this got to a point where Mexx Canada asked for, and got permission to, stop sourcing from Mexx Europe. That fashion was simply too ‘out there’ for real people.
  3. Now what? New design team started early this year. Li&Fung accounts of 70% of biz – which is still big – but now there are others to keep them in check.
  4. AUR is coming down by 10%, but 2/3 of Mexx product has been selling at a discount, as opposed to peers of 1/3.  The company can offer better product 10% lower in price and probably increase traffic and conversions.
  5. Will this happen overnight? No. But this has been a BIG problem for a long time, and most US investors don’t get it bc it is all about Europe and Canada. We could see as much as a $0.30 swing in EPS next year if this gets to a 2-3% EBIT margin.

3)      There are other factors as well – such as the closure of LIZ’s perennially underperforming outlet stores – which will add another $0.12-$0.13 per share next year – and the additional cost costs at HQ.

4)      Also, did we mention the balance sheet?  We’re looking at a $200mm, or $2.15 per share swing, in operating cash flow at a time when the business is becoming less capital intensive. Interest expense should come down from $65mm last year to just under $30mm by 2012.


Are we concerned about cotton? Yes. But that’s not in the top 5 factors that matter here. We can’t say that for many other companies in retail.

Get Up and Strike, Europe

Hedgeye Portfolio: Short Italy (EWI); Long Germany (EWG); Long British Pound (FXB)


“Get up and Strike, Europe” or at least that seems to be the message today, with an estimated 50,000 people across the region standing against government-sponsored austerity measures to trim public debt and deficits. Certainly we believe it’s important to note a coordinated strike across Europe against austerity (which weighed on equity markets today and pushed up bond yields), however, we’re quick to note two points to keep this strike in perspective: 1.) you can bet this won’t be the last strike in Europe over austerity, and 2.) strikers will remain a small minority of the population = we’re not talking about economies grinding to a halt during strikes.


We’d direct you to our website ( to read more of our work on the implications of austerity in Europe. In short, our position remains that we’re bullish from a top-down perspective on countries that issue austerity measures to clean up their fiscal houses. That said, fiscal trimming will not be a panacea across Europe to cure its ails. We see clear divergence among countries; we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain.


Below we show graphically the data out today from Europe, with minimal commentary included, to keep the dialogue open on our positioning in Europe.


Matthew Hedrick



Get Up and Strike, Europe - n1


Get Up and Strike, Europe - n2


Get Up and Strike, Europe - n3


Get Up and Strike, Europe - n4

Tougher Road Ahead for Sports Apparel Near-Term

Despite what seems to be a meaningful erosion at face value, the underlying trend in sports apparel sales remains positive (+3%) on a trailing 3-week basis. While the week ending Sunday the 26th marked the greatest sequential deceleration since May 23rd, it’s important to note that at this time last year we saw the start of 3-week growth spurt brought on primarily by a nationwide cold snap through the first 3-weeks of October as well as UA’s shift into expanded fits beyond compression to fitted (non-compression) product. During that time last year, total sales accelerated from +2% this past week to +3%, +7%, and +15% while Sport Retailer sales ramped from +9% to +8%, +9%, and +19% as highlighted in the charts below.


The biggest anomaly for the week is that the Athletic Specialty retailers underperformed the mass, discount and channels on the margin.  Given that it’s only a week, this is not enough for us to challenge any of our models – but we’ll keep an eye on the trends to monitor any sustained channel divergence.


On a branded basis, sales slowed across the board sequentially. Additionally, a divergence in performance over the last two weeks has emerged with Under Armour outpacing Nike – something that we’ll be watching closely in the next few weeks but expect to moderate. Why? Recall UA introduced its expanded offering of fitted (non-compression) product in mid-October. This in turn drove sales up +56% the week ending October 18 and trailing 3-week trends materially higher. The product intro also added nearly 5% to an already strong base. At the same time Nike increased 18% driven by accelerated growth in the family channel most likely reflecting the clearance of underperforming product. Now we’ve got Nike sporting a 20%+ growth rate in its North American futures.


As much as we try to avoid the weather card, we can’t ignore temps hitting record highs in certain parts of the country as we start to anniversary unseasonable cooler weather. That said, October will be an important month for UA as it comps its toughest month of the entire year.


Casey Flavin



Tougher Road Ahead for Sports Apparel Near-Term - App Table 9 29 10


Tougher Road Ahead for Sports Apparel Near-Term - FW App AppChan 1yr 9 29 10


Tougher Road Ahead for Sports Apparel Near-Term - FW App AppChan 2yr 9 29 10


Tougher Road Ahead for Sports Apparel Near-Term - App Weather 9 29 10


Tougher Road Ahead for Sports Apparel Near-Term - App Weather 3W 9 29 10


Tougher Road Ahead for Sports Apparel Near-Term - NKE Apparel T3W 9 29 10


Tougher Road Ahead for Sports Apparel Near-Term - UA Apparel T3W 9 29 10



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