HST should handily beat, as everyone knows, but the lack of a big forward guidance raise could disappoint



Host Hotels reports its 3rd quarter results on Oct 13th.  We are projecting $1,019MM of revenue, $159M of EBITDA and FFO of $0.13 - handily beating consensus numbers.  HST should modestly raise guidance for FY2010, which may imply in-line to slightly lower guidance for Q4.  We do think that the 3rd quarter will mark the last big beat and raise quarter. 


We’re below the street for most lodging company results starting in 2Q2011.  Our thesis is that the April-July period of 2010 benefitted from pent up demand and we've seen a sequential slowdown since July.  The seasonally adjusted dollar RevPAR figures for August and September support our thesis.  Q2 2011 RevPAR may actually turn negative.  Up until then, however, analysts' estimates look reasonable but full year 2011 looks high to us.



3Q2010 Detail:

*** Note our numbers aren’t same store

  • Property revenue of $949MM
    •   Room revenues of $627MM growing 8.2% YoY
      • RevPAR up 10.8% YoY to $120.09
      • Occupancy at 74.6% and ADR at $161.09
    • Food and beverage revenues growing 6% YoY to $257MM
    • Other revenues up 3% YoY to $66MM
      • We assume lower cancellation and attrition fees negatively impact this quarter’s results by $5MM
    • Rental income of $20MM; $60MM of revenues from leased select service hotels & office buildings and a $10MM charge for hotel sales for property which HST records rental income
    • $741MM of property level expenses, broken out as follows:
      • $179MM of room expenses, amounting to a 6% YoY increase and a CostPAR increase of 2%
      • $213MM of food & beverage expenses, representing a 4% YoY increase
      • $271MM of hotel departmental expenses
      • 2% YoY increase in other property level expenses to $78MM, which equates to a 1.9% CostPAR
    • Management fees of $39MM, increasing 18% YoY
    • $169MM of property EBITDAR
    • Rental expense of $14MM; $61MM of expenses from leased select service hotels & office buildings and a $10MM credit for hotel sales for property which HST records rental income
    • Other stuff:
      • $24MM of corporate expense
      • $138MM of D&A
      • Net interest expense of $82MM
      • $13MM of taxes
      • 675MM share count  for FFO calc

EARLY LOOK: What Makes It So Hard


“What makes it so hard is not that you had it bad, but that you're that pissed that so many others had it good.”

-Melvin Udall


EARLY LOOK: What Makes It So Hard - Jack Nicholson



In 1997, Jack Nicholson won the Oscar for Best Actor for his portrayal of an obsessive-compulsive Melvin Udall in “As Good As It Gets.” Particularly for anyone who has ever lived and worked in New York City, this movie really resonated. It was human.


As the Street makes its final push into year-end bonuses, this Melvin quote may not speak as loudly to some of us, but it’s ringing loud and clear across America. How else could the US stock market have its best September in 71 years and US Consumer Confidence readings go DOWN month-over-month? While Americans may not know what “QE” means, they’re pretty sure they should be pissed about it…


Let’s set aside the Manic Media begging Bernanke for more of what he himself has no idea will perpetuate and consider 3 intended consequences that make this so hard for common sense people to accept:

  1. Debauchery of America’s currency.
  2. Record low rates of return on savings accounts.
  3. Economic stagflation.

Now now, don’t get all in a heat here if you are in the perma-deflation camp. At lower prices, we’ll be right there with you. For now prices are inflating. Last week saw gold hit another record high. Oil and copper prices were up another +6.7% and +2.2% week-over-week, respectively.





EARLY LOOK: What Makes It So Hard - Federal Reserve



Consequence #3 is a direct function of the US Federal Reserve being willfully blind to points #1 and #2.


What makes this so hard is the truth.


The truth is that Americans don’t have to buy into Officialdom’s portrayal of the truth. In “A Few Good Men”, Nicholson’s character tried pulling rank by suggesting “you can’t handle the truth!” Sometimes the “authorities” on critical American matters are wrong about the definition of truth.


Americans know the truth. Americans don’t like being lied to. The truth is marked-to-market on their desktop and in their bank accounts every single minute of the day.


For the 1st week in the last 5, the SP500 was down last week. It was barely down, but the point is that it was down. My submission on why is very straightforward. The Burning Buck starts to morph into a very bad thing, turning reflation into inflation, at a price.


Now slowing US economic growth + accelerating inflation growth = economic stagflation for those countries who have a higher nominal rate of inflation than they do economic growth. For countries that have to implement austerity measures, this problem will compound itself by real-wage growth starting to go negative year-over-year. The only thing worse than not having a job is getting a pay cut.


Back to a real-time update on the intended consequences of Bernanke’s plan:

  1. US Dollar = down another -1.64% last week; down for the 15th week out of the last 18; and down -11.8% since June!
  2. US Treasury Yields = down another -6.8% last week to 0.41% 2-yr yields; and down again this morning to a record low 0.40%


EARLY LOOK: What Makes It So Hard - 2yryield



Again, that’s just the truth. And the truth is that a country has never devalued its way to prosperity. Sure, in the short term, inflation makes this good for some of us. But, in the long run, some of us need to remember that it’s the rest of us that matter most.


My immediate term support and resistance lines for the SP500 are now 1141 and 1155, respectively. I currently have a 52% position in Cash in the Asset Allocation Model (down from 55% on Friday as I added a 3% position in corn). In the Hedgeye Portfolio, I’ve moved to 13 long positions and 11 shorts.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer



This note was originally published at 8am this morning, October 04, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

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Bear/Bull Battle: SP500 Levels, Refreshed ...

The inverse relationship between volatility (VIX) and the SP500 (SPY) remains a critical one to both observe and manage risk around.


I don’t see today’s abrupt breakdown of the SP500 as surprising. It occurred immediately after the VIX broke out above our immediate term TRADE line of 23.10. Currently, the VIX is testing 24.50 and is breaking out above our most immediate term risk management duration for the 1st time since early August.


In terms of critical lines of SP500 support, there are two: 

  1. TREND (intermediate term) = 1144
  2. TRADE (immediate term) = 1141 

Currently, both of these lines are broken. In conjunction with the VIX breakout, that’s bad.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed ...  - 1

JNY: Stop Jonesing Us

Are we the only ones that got a chuckle out of Jones Apparel Group's (JNY) announcement this morning that it is changing its name to The Jones Group Inc. ?


Yeah...we get it -- JNY sells more than just apparel. It also has 9 West, Stewart Weitzman, etc... But the reality is that apparel still accounts for 98% of segment EBIT.


Wouldn't this move have made more sense when JNY owned Barney's? (even then it would have been odd).


Doesn't the Board have more pressinig things to do than changing the company's name?


Isn't it ironic that this happens just as the apparel environment is hitting  a wall?


We're not suggesting that they think a name tweak will change their fortunes. But quite frankly, while we always like to provide a conclusion and appropriate context in our research, in this instance we don't have a clue as to what these guys are thinking.




R3: Toning, Kmart, Uniqlo, & 3D


October 4, 2010


Efforts to ride the toning wave continue with the addition of Fila and Crocs entering the competitive fray.  





  • According to an Internet Retailer survey, nearly 9% of retail organizations operate a mobile commerce site, but 53% expect to launch one within the next 12-months. Perhaps a reflection of another study out of Coda Research Consultancy, which expects U.S. mobile commerce sales to grow roughly 10x over the next 5-years on a base of $2.4Bn in 2010. With expectations high for the channel, retailers feeling that they have come up short in their e-Commerce efforts may have renewed interest in stepping up mobile initiatives.


  • Japanese retailer, Superdry, continues its U.S. expansion with the opening of the company’s third stateside location in San Francisco.  Recall that the Abercrombie-esque retailer has two existing locations, one in NY and the other in LA.


  • With holiday shopping now underway, Kmart is expanding its layaway program by expanding its program over 10-to-12 weeks from 8 weeks last year. In addition to extending the program, the company is also adding additional items including washers and dryers as well as other big-ticket items.



Belk's Rebranding Initiative - The $3.5 billion Belk Inc. wants to flaunt the hipper, modern side of its southern charm. “We are investing in our business in a big way and updating our image,” Tim Belk, chairman and chief executive officer of the nation’s largest private department store group, told WWD. “Branding will be a big deal. We don’t want to leave any customers behind. We are focusing the message and trying to make a more emotional connection with our customers.” It’s a matter of shifting priorities — and investing tens of millions in a new look. “The focus in the next two to three years will be on organic growth, getting our stores to be more productive,” Belk said. “If you look a little further than that, you will see new store growth in the next two or three years.” While it’s long excelled in cosmetics, the Charlotte, N.C.-based chain that operates 305 stores in 16 states seeks a better balance by pumping up a host of categories — shoes, jewelry and denim among them — that have lagged the times. <WWD>

Hedgeye Retail’s Take: After growing through acquisition from 2002 through 2007, management teams across the industry have been forced to take a hard look at organic growth. For a model like Belk, which relied heavily on layering on sales year over year, taking a hard look at existing store productivity is no longer an option. At this point, it’s the right move (perhaps the only move), but like the majority of these initiatives we suspect it will be more costly and time consuming than management anticipates.


Uniqlo Comps Struggle in Sept. - Unusually hot weather continued to bite into Uniqlo’s sales performance for the month of September, pushing comps down 24.7 percent. Uniqlo parent Fast Retailing said Monday that warm temperatures discouraged shoppers from snapping up fall apparel. The numbers only refer to Uniqlo’s business in Japan. The company similarly blamed the record-breaking heat wave for a 9.3 slump in August same-store sales. The Japan Department Store Association has also lamented the steamy summer’s impact on retail here. Its members posted a 3.2 percent decline in August comps. Fast Retailing’s sales have been uneven lately, but the September figures represent the largest monthly drop so far this year. <WWD>

Hedgeye Retail’s Take: Expect to hear much of the same from underperforming domestic retailers come sales day on Thursday given an unseasonably warm end to September.  


Crocs Eyes $1Bn - Could Crocs Inc. become a billion-dollar company? Company President and CEO John McCarvel thinks so. To get there, the Niwot, Colo.-based firm, which has made strides to return to profitability, is stepping up its product range to woo an “extended population of consumers,” McCarvel said last week during a presentation to analysts at the brand’s Spring Street flagship. With that in mind, Crocs has diversified into toning — producing 12 to 16 styles of sandals, flip-flops and flats called CrocsTone, launching next month — and added sneakers and rainboots that all retail for less than $75. As it rolls out new looks, Crocs said it expects its core clog style to account for less of the revenue pie. <WWD>

Hedgeye Retail’s Take: The company has wasted little time refocusing on the top-line under McCarvel’s watch since taking the helm. While the portfolio has made significant strides towards becoming a real footwear company versus just a fad, we just hope management isn’t banking on toning to get it to the $1Bn mark.   


Fila Targets U.S. & Toning - Having raised nearly $100 million from its IPO last week, Fila Korea Ltd. now plans to use some of that money to help Fila USA grab market share. For starters, it will ramp up new product offerings. Next week, the brand will bow a line of toning apparel called Fila Body Toning System, said Jennifer Estabrook, EVP of business operations at Fila USA. And later this month, it will add a “grassroots performance basketball initiative” that will focus on footwear. For spring ’11, Fila’s product lineup includes a new range of performance tennis shoes, a line of training apparel for both men and women, and a footwear, accessories and apparel collection for its 100th anniversary, said Estabrook. “At this moment, the U.S. business is in a growth mode. The strategic changes made to the brand over the past three years have worked beyond expectations, leading the momentum that the brand is experiencing right now,” Fila USA said in a statement. “The IPO proceeds will help fund that growth.” <WWD>

Hedgeye Retail’s Take: The latest newcomer to the toning category is what it is, but looking to the U.S. for growth across its portfolio is a natural for the brand. Given Fila’s growth in Korea of late, domestic brands will do well to mind the ‘not so new’-comer.  


MBT to Offer more Styles for Spring 2011 - MBT is on a new mission: to reinforce its wellness message to consumers, retailers and the media. Executives at the brand, distributed by Portsmouth, N.H.-based Masai USA, said they are aiming to stand out from all the new toning product. “There’s an onslaught of toning shoes [on the market],” said Sam Spears, VP of product and marketing at MBT. “We didn’t expect it. We don’t think of MBT as toning. We’ve thought of it as wellness.” According to Klaus Heidegger, a majority shareholder, MBT does not view today’s toning brands as competition because they don’t offer the same core health and wellness benefits as MBT. “It’s a different audience,” he said, adding that MBT has a more sophisticated consumer base. “Our footwear has an effect on the whole body. People will not compromise by going with a $100 brand.” Helping boost sales is more fashion-driven product, with 20 percent more styles in the collection for spring ’11 than a year earlier. “There’s more interest in lifestyle product,” said Spears. “There are lots of careers where people work on their feet, and they like the casual as well as dressy styles.” <WWD>

Hedgeye Retail’s Take: After being eclipsed by the marketing prowess of Reebok and Skechers at warp speed, what else can you expect to hear from MBT? The key here is the simple fact that even more styles will be available in the category come Spring 2011.


New Fall Athletic Product - Calif.-based K-Swiss is expanding its lightweight running franchise with the spring ’11 introduction of the Kwicky Blade Light, a $130 men’s and women’s style. Featuring a low-profile outsole with side vents and a seam-free upper with welded overlays, the Kwicky Blade Light is also treated with P2i’s ion mask waterproofing technology, allowing the shoes to stay the same weight throughout races, according to the company. The shoe will deliver to running independents this January. Starting this holiday season, Canton, Mass.-based Reebok is expanding its EasyTone and ZigTech sneaker franchise into apparel. In November, EasyTone apparel will debut at mall-based athletic and sporting goods retailers. Like the resistance-adding EasyTone outsole, the apparel collection features stretchy plastic over- and underlays that the company calls “toning bands,” which provide extra resistance when the wearer is stretching or lifting. The women’s only styles include a tank (above) and a tee and shorts, capris and pants. Retail prices range from $55 to $75. In May, a men’s collection under the TrainTone label will launch with tops and briefs for $50 to $55. Also for spring ’11, Reebok is expanding its ZigTech sneakers into apparel for men and women. The collection will follow the distribution of the shoes into mall athletic and sporting goods stores. <WWD>

Hedgeye Retail’s Take: Lightweight & Toning innovation will leave its mark on 2010 when all is said and done, but the next stage of the trend into apparel is a natural progression and hardly a surprise. Given the public response to toning footwear, we expect most retailers to reallocate some portion of their racks to the new lines come fall.


R3: Toning, Kmart, Uniqlo, & 3D - R3 10 4 10


3-D Sunglasses Coming to a Store Near You - With 3-D technology set to infiltrate multiple areas of everyday life, from iPhones to packaging, polarized designer 3-D specs that also function as regular shades are set to be the next big thing for the eyewear industry. That’s the prediction of Marchon executives, who at Vision Expo West this week in Las Vegas, will unveil polarized 3-D sunglass lines by Nike, ck Calvin Klein Eyewear, Nautica Eyewear and M3D Collection. Attending the recent edition of the Silmo eyewear salon here, Claudio Gottardi, president and chief executive of Marchon International, said the large quantities of passive-system 3-D technology-embedded TVs, laptops and games currently being shipped to stores for the holiday season could translate into a major volume increase for the industry. Getting into position, the firm in July created Marchon3D, in a joint venture with 3-D technology provider RealD Inc., the firm that developed the official 3-D specs used for “Avatar” screenings. <WWD>

Hedgeye Retail’s Take: With 3-D flat-screen televisions still running at a significant premium to their 2D counterparts, the market size/opportunity appears limited. However, it’s been a while since sunglasses have experienced a significant technological innovation – perhaps this is the impetus for reinvigorated demand.



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