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The New NFL: (N)ike (F)oot (L)ocker

The NFL license is officially heading to Beaverton for the start of the 2012 season and we believe this has larger implications than the obvious impact it will have on Nike.   Recall that back in March we laid out a thesis on Foot Locker that included both financial and strategic opportunities. One of our key beliefs was that CEO Hicks and his team would begin to forge exclusive partnerships and distribution arrangements aimed at driving more full priced selling, less discounting, and higher gross margins.  Much like the company’s efforts to partner Champs with the NBA and Adidas, we now believe that an NFL/Nike/FL partnership is in the works. 

 

In fact, we would not be surprised to see FL leverage its existing real estate to strategically develop a House of Hoops type effort centered on the NFL.  Given the broad scope of the NFL license, which includes on-field, sideline, baselayer, and sportswear it is probable that a FL/NKE collaboration could effectively merchandise a full NFL retail experience as both a shop-in-shop and a freestanding effort.  Clearly FL’s 2,700+ store base in the U.S offers a substantial competitive advantage in targeting specific regional team preferences.  With 32 NFL franchises, there is ample opportunity to segment the store portfolio to very precise demographics.  In fact, we note that Nike’s analyst meeting in May focused on the company’s capabilities in using sophisticated analytics to map, target, and identify local product and merchandising opportunities in the U.S down to the Street or shopping venue level.  We suspect this will be a key part of identifying which locations are optimal for a NFL focused store or shop-in-shop.

 

While timing is still over a year away, we believe we will be hearing more about this strategy as both companies continue to develop a plan to maximize the sizable NFL opportunity.  Realistically,  details will be scant for some time as the existing license remains in Reebok’s hand for one last season.  As a league, the NFL remains the holy grail of all domestic professional sports.  TV viewership and league profits are coming off of a record season last year and are expected to surpass peak levels yet again.  So far through four games this year, 150 million people have tuned in to watch at least part of a game up from 146.1 million last year.  We believe this could be a meaningful opportunity for FL and one that is just part of the differentiation and store segmentation strategy that is key to ultimately driving EBIT margins past prior peak levels of 7.6%. 

 

Eric Levine

Director


HST 3Q2010 CONF CALL: "NOTES"

With no surprise to anyone, HST beat consensus through good cost controls. However, 4Q guidance is at the low end of expectations with top end just touching consensus. Here are our notes from the conference call.

 

 

HIGHTLIGHTS FROM THE RELEASE

  • "The increase in RevPAR was significantly affected by the improvement in average room rate for transient business of 6.8% combined with an increase in transient demand of 1.8%.  Group demand increased 7.9%, combined with a 1.3% increase in rate. For year-to-date 2010, comparable hotel RevPAR increased 5.6%."
  • "Comparable hotel adjusted operating profit margins for the third quarter of 2010 increased 150 basis points, despite a $5 million, or 50 basis point, decline in revenues from attrition and cancellation fees compared to 2009."
  • "During the third quarter the Company completed the acquisition of three, high-quality hotel assets in New York, Chicago and London for a total investment of approximately $430 million, including assumed consolidated debt of $166 million."
    • HST will use $121MM of cash to defease the mortgage assumed on the W New York-Union Square
  • "Subsequent to quarter end, the Company acquired the 245-room JW Marriott Hotel Rio de Janeiro, Brazil for approximately $48 million."
  • "During the third quarter of 2010, the Company issued 7.4 million shares of common stock at an average price of $14.08 for net proceeds of approximately $103.5 million."
  • FY 2010 guidance changes:
    • Lowered comparable revenue guidance by $84 to $106MM
    • Lowered comparable expense guidance by $77MM to $85MM (so lower revenues but better cost controls)
    • Increased Corporate & Other expenses by $5MM
    • Tightened FFO guidance (up 1 penny on the low end and lowered by 1 penny on the top end)

 

CONF CALL NOTES

  • Ancillary revenues increased 1.6% and comparable F&B increased 6% YoY
  • YTD comparable F&B grew 4.3%
  • Improvement in RevPAR has continued to shift towards rate and business mix has continued to improve
  • Would expect to see continuing strength in rate as mix improves towards better rated business
  • Group revenues increased by 9%, driven by a 1% increase in rate and an 8% increase in room nights.  Demand was driven by luxury corporate and association business
  • Booking cycle continues to be very short.  Group booking activity is up 6% for 4Q compared to last year. 
  • As they look out to 2011, their booking pace is up slightly
  • Acquisition price on the 4 assets they recently bought represent a 14x multiple on 2010 EBITDA and were at a 40% discount to replacement cost
  • Outlook for the rest of the year:
    • Improvement in RevPAR was offset in a more cautionary outlook on F&B and ancillary revenue
    • FFO was impacted by debt repayment and acquisition costs
  • 2011 guidance will be given on their next call in February
  • New Orleans and Orlando were the best performing markets
    • New Orleans RevPAR was up 28.3% (8.3% ADR & and 12pts of occupancy). The hotel benefited from a significant increase in group room nights and contract business related to the Gulf oil spill clean up.  For 4Q, expect the property to underperform the rest of the portfolio due to less city wide business.
    • Orlando RevPAR was up 26.7% (all Occ driven).  Group demand particularly association business increased significantly.  Expect underperformance in the 4Q due to lower levels of group business and the start of the rooms’ renovation at the hotel
  • Chicago RevPAR was up 14.2% (occupancy +3% & ADR +9.4%) despite 2 less citywide events; they benefited from more corporate business. Expect Chicago to perform in-line in 4Q.
  • Boston RevPAR was up 14.5% (ADR +6.9%; Occ +5.8%). Outperformance was driven by a 30% increase in group and citywide room nights. Expect the hotel to underperform in 4Q due to fewer city-wide room nights and ballroom renovation.
  • NY RevPAR +12.9% (driven by 12.4% increase in ADR). Reached nearly 91% occupancy, Expect NY to have a very good 4Q despite room renovations.
  • Hawaii finally recovered. RevPAR +11.8% (ADR was up 8.3%) due to increased air capacity and better group demand.  Expect to outperform in 4Q.
  • Denver RevPAR +11.8% (occupancy +7.2%).  Expect them to outperform in 4Q.
  • San Fran: RevPAR up 11% (ADR up 3.9% and Occ +5.3%). Expected to perform in-line in 4Q
  • San Antonio RevPAR fell 7% (6.6% decline in occupancy).  The poor performance was due to lower transient and group demand. Expect hotels to rebound in 4Q and outperform the portfolio due to a substantial increase in group and citywide demand.
  • Phoenix RevPAR declined over 9.8%. Expect these hotels to continue to underperform the portfolio due to continuing renovations
  • San Diego is expected to significantly outperform in the 4Q
  • European JV RevPAR was up 10.3% -  in constant Euros
  • Rooms flowthrough was excellent at over 80%
  • F&B flowthrough was worse than expected due to more cautious group spend
  • Unallocated costs increased 7% - all due to variable expenses. Utility increased 6.2% due to higher utility usage costs due to weather, property taxes decreased 1%, and insurance decreased 20%
  • In the 3rd Quarter, they terminated their sublease of the HPT hotels due to a default of their tenant. They will terminate the residence in properties on Dec 31, 2010.  They will also terminate the lease on the 53 courtyards effective Dec 2012.
  • W Union Square mortgage is $115MM

Q&A

  • Expect that roughly 1/3 of their hotels will be paying incentive fees by year end.  Don't expect anywhere close to 2/3rds to be paying by end of 2011.
  • Corporate rate negotiations? Doesn't have anything to really add to Arne's comments.  Still very early. Some early customers that renegotiated came in at high single digit rate.
  • Broadly speaking they are more focused on the coasts than the middle of the country for ownership. 
  • Groups are meeting again, but are being more cautious on what they spend on F&B especially during breaks. So group spending per customer is down a little. On the ancillary revenue, they aren't seeing as much spending on spa and golf.  Given the occupancy increases, they were hoping to see more growth on that side. They also hope that at some point they will begin to be able to start charging for meeting rooms - which have good margins.  Have only been able to do so in limited markets.
  • Have looked at the JW Marriott in Rio a few years ago but there were some title issues that needed to be resolved.  Still suspect that the majority of the assets that they are looking at will be domestic. 
  • Expect that 2011 wage increases will trend above CPI by a percent or two. Have had some pressure on the wage area as bonuses come back in this year, but next year the increase shouldn't be as material year over year since it's not off of a zero base.
  • Things aren't moderating, comps are just getting a little more difficult. They also have some renovations in Nov & Dec - when business levels are usually lower and therefore disruption isn't as great.
  • September was up 9% for them. Booking pace continues to follow the same pattern of strong close in bookings. Supply is also moderating which helps.
  • Despite the fact that GDP is weaker, corporate earnings and results are trending stronger than expecting, which is good for spending. They expect corporate investment to be up in 2011 over 2010.
  • 80% flowthrough on room revenues is as good as it gets really
  • International exposure for them is roughly 7-8%.  In the future if they feel like they can successfully invest abroad, then they may increase exposure there.
  • If rates were to increase, they still believe that pricing will hold up since increased rates means that business is also better. Also while rates are lower it's also harder to get leverage.  Cap rates should trend up as the anticipated growth rate moderates. Also over time, pricing on assets and replacement cost tends to converge.
  • Thoughts on development? Would be surprised if they saw progress on new full service development over the next 12 months.  Think that 2005-2006 is a good proxy for growth. Luxury development will be even tougher since in the past, hotels were subsidized by condos. Do expect growth in limited service.
  • Expect occupancy to also be up next year, but rate growth should play an increasingly larger role. While mix shift has helped, they have also been getting increases in rate.

Sports Apparel: Very Positive Trend Confirmation

The past two weeks of sports apparel sales were down. We’d been waiting for a third week to call it a trend. It didn’t happen. The sports apparel channel staged a meaningful rebound in the latest week.

 

Sports Apparel: Very Positive Trend Confirmation - AppFW Table 10 13 10

 

Sports Apparel: Very Positive Trend Confirmation - AppFW Chan 2yr 10 13 10

 

 Sports Apparel: Very Positive Trend Confirmation - AppFW Chan 10 13 10

 


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Eye On Asia: The Good, The Bad, and The Ugly

Conclusion: The bevy of economic data out of Asia over the last 48 hours makes us question the legs behind the bullish rally in many Asian equity markets. In addition, the data grows increasingly supportive of the relative underperformance of Japanese equities.

 

Positions: Long Chinese Yuan (CYB); Short Japanese Equities (EWJ); Short Japanese yen (FXY); Short Indian Equities (INP); Short Emerging Market Equities (FFD)

 

There has been a slew of economic data coming out of Asia over the last 48 hours – some good, some bad, and some ugly. Rather than belabor the point(s) with excessive prose, we’ll just highlight the meaningful deltas and inflection points in the call-outs and charts below.

 

The Good 

  • Japan’s Machine Orders grew in August to +10.1% MoM from +8.8% in July. This is the largest monthly increase since December and, while stale, this data point is serving to pare back concern regarding the frailty of Japan’s economic recovery.
  • Malaysia’s Industrial Production accelerated in August to +4% YoY from +3.2% in July.
  • Australia’s Consumer Confidence inflected in October, accelerating +3.3% to 117 from a (-5%) drop in September.
  • Australia’s Business Confidence Conditions Gauge (hiring, sales, and profits) rose in August to 7 from 5 in July.
  • Hong Kong’s introduced a rent-to-buy program for foreigners looking to buy property. This is an incremental measure to combat surging housing prices that have increased nearly 50% since 2009. 

Eye On Asia: The Good, The Bad, and The Ugly - 1

 

Eye On Asia: The Good, The Bad, and The Ugly - 2

 

The Bad

 

  • China’s Export and Import growth slowed in September, which, on the margin, highlights a deceleration in Chinese and global demand. Exports slowed to +25.1% YoY from +34.4% in August; Imports slowed to +24.1% YoY from 35.2% in August. This lends further support to the claim that inflating commodity prices globally are more the result of dollar debasement than any other factor.
  • China’s central bank temporarily raised reserve requirements 50bps for six large commercial banks to rein in excess liquidity and fight inflation. The current levels are 17% for the largest lenders and 15% for smaller institutions. This latest move is in response to China’s accelerating inflation, which hit a 22-month high in August. Central Bank Governor Zhou Xiaochuan also recently said it may take two years for the inflation rate to fall below 3%, which is a firm stance against a potential interest rate hike and global calls for expedited yuan appreciation.
  • Malaysia’s Export growth decelerated in August to +10.6% YoY from +13.5% in July.
  • Dai-ichi Life Insurance Co., Japan’s second largest-insurer, plans to boost its holdings of JGBs in lieu of Japanese equities. The Nikkei, which is down (-11%) YTD, may come under substantial incremental pressure should more Japanese insurance companies and pension funds follow suit.
  • Australia’s headline Business Confidence declined in August to 10 from 11 in July. 

Eye On Asia: The Good, The Bad, and The Ugly - 3

 

Eye On Asia: The Good, The Bad, and The Ugly - 4

 

The Ugly 

  • Japan’s public pension fund plans to expand its investments to include emerging market equities next summer. This marks the beginning of the end in terms of Japan’s reliance on domestic demand for JGB financing (~95%). As of 2008, 61% percent of JGBs were financed directly or indirectly from the funds of Japanese households. With this tailwind becoming a headwind over the long term, how will JGBs attract foreign buyers with such low yields going forward? Refer to the long term call outlined in the Japan’s Jugular section in Hedgeye’s 4Q Macro Themes presentation for more details.
  • Japan’s Consumer Confidence dropped in August to 41.2 from 42.4 in July. One of the key tenets to our Japan’s Jugular intermediate term call is that yen strength bodes poorly for Japan’s domestic economy, which is levered to exports as the main driver of growth. With exports slowing, we expect the side-effects (rising joblessness, declining consumer and business confidence, etc.) to be a major drag on that economy over the next 3-6 months.
  • Korea’s PPI accelerated in September to +4% YoY from +3.1% in August.
  • India’s Industrial Production decelerated in August to a 15-month low: +5.6% from a revised +15.2% increase in July.  The slowdown in industrial output may weigh on the central bank’s decision to continue rate hikes to fight India’s rampant inflation going forward. 

Eye On Asia: The Good, The Bad, and The Ugly - 5

 

Eye On Asia: The Good, The Bad, and The Ugly - 6

 

The Murky 

  • China’s FX Reserves grew to a record $2.65 trillion in September from the prior $2.45 trillion, adding concern that the U.S. will accelerate protectionist litigation through Congress. This morning, Senate Finance Committee Chairman Max Baucus went on record saying a bill that would “punish” China for its undervalued yuan is likely to get past the Senate and onto President Barak Obama’s desk.
  • The MSCI Emerging Market’s Index historical volatility closed at 12.1 last week – the lowest levels since July 2007. In our models, depressed volatility could potentially be a contra indicator and a signal to sell. Looking back historically, we see the measure increased off its lows to 27 just prior to the EM Index peak in October 2007.
  • Thailand will remove a 15% tax exception on foreign income from domestic bonds in an attempt to stem gains in the baht. This is just another action amid a growing list of steps taken by foreign central banks to combat excessive currency gains amid Fed-sponsored dollar debasement. QE may be good for a near-term equity rally, but the dollar’s decline is restricting export competitiveness and stoking inflation globally. Exports account for roughly 70% of Thailand’s GDP. 

While we continue to be favorably disposed to Asian countries with strong growth profiles like China, Singapore, and Indonesia, we would be remiss to join in on the rally and decoupling talk now. We are likely buyers on pullbacks provided these markets hold important quant lines of support in the event of a dollar breakout. That, however, remains the biggest “if” in all of global macro investing right now.

 

For now, we are content to wait and watch.

 

Darius Dale

Analyst


STRIP BACCARAT TOOK A BIG BREATHER IN SEPTEMBER

The implied September baccarat volume looks pretty weak based on MGM’s pre-announced results.

 

 

We think September Strip Baccarat volume may fall 50-60% after posting 40% and 87% YoY increase in July and August, respectively.  That would bring total baccarat volume growth for the quarter to 26-29%.  Good, but not as good as everyone thought on Friday when the blockbuster August numbers were released by the Nevada Gaming Commission.

 

STRIP BACCARAT TOOK A BIG BREATHER IN SEPTEMBER - mgm2

 

With its pre-announcement yesterday, MGM showed a baccarat volume decline at its wholly owned properties (so excluding Aria) of 6%.  That is a very poor showing.  It is our understanding that MGM’s baccarat market share was 35-40% and over 50% including Aria.  Applying some simple math to MGM’s reported baccarat volume and the Nevada state figures leads us to the conclusion that September baccarat volume may be down 50-60%, even if MGM’s market share fell 10 percentage points.  Of course, if they maintained share, then September Strip baccarat volume would have fallen even more.

 

We don’t want to marginalize the baccarat business.  After all, this segment carried the Las Vegas Strip through the downturn and volumes continued to grow this year.  However, relative to expectations, investors have to be disappointed with the full quarter volumes after Friday.  We will need to reevaluate our model projections for WYNN and LVS again after raising our Las Vegas estimates following Friday’s Nevada release.


R3: JCP, COH, SHLD, PERY, and Fila

R3: REQUIRED RETAIL READING

October 13, 2010

 

The JCP/Ackman chess match remains front and center today while Fila becomes the first brand to market with toning apparel just in time for the holidays.

 

RESEARCH ANECDOTES

 

- In the “really?” category, we note that teen pop star Justin Beiber inked a deal to release a collection of 6 nail polishes.  Perhaps this is the product that Wal-Mart needs to get traffic moving in a positive direction.  The line is set to launch at WMT in December, followed by a rollout into Target and Sears early next year.

 

- Coach tops the list of the second annual Digital IQ Index of luxury brands, skyrocketing from the middle of the pack last year to the top.  The index measures the “digital competence” of luxury brands.  Rounding out the top five in order are: Ralph Lauren, Louis Vuitton, Gucci, and Hugo Boss. 

 

- According to the Gallup Well-Being Index, 6 in 10 Americans are either overweight or obese.  Approximately 36% fall into the overweight category while 26.6% are obese.  The good news here is that the obesity rate has been essentially unchanged for two quarters. 

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

JCP Hires Goldman Sachs To Play Defense Against Bill Ackman - J.C. Penney Co. Inc. has taken a page from the Target Corp. playbook and hired Goldman Sachs to help play defense against activist investor William Ackman, sources said. Ackman plans to “engage in discussions” with Penney’s management and other stakeholders concerning the firm’s “business, assets, capitalization, financial condition, operations, governance, management, strategy and future plans.” Little is known of Ackman’s plans. <wwd.com/business-news>

Hedgeye Retail’s Take:  Given that Target ended up holding its own against Ackman, the move to hire the same defensive player probably makes a ton of sense.  In the meantime, this will unfortunately become a costly battle that shareholders are likely going to pay for.

 

Levi Strauss Sales, Expenses Grow - Net income at Levi Strauss & Co. dropped by 30.8% in the third quarter while sales improved as the company increased spending on new stores and advertising its Levi’s and Dockers brands. Total net revenue was up 6.6%, driven by the strong performance of the Levi’s brand in the Americas, the company’s acquisition of 73 outlet stores operated by a third party in 2009, and the expansion of the company’s retail store base, offset by wholesale declines in Europe and Japan. Although Europe did grow 6% cc, the 9% FX impact erased all growth. SG&A increased 15.5% primarily due to the spending on new stores and marketing. <wwd.com/business-news>

Hedgeye Retail’s Take:  While the topline was supported by such investments, we note that expenses and not increasing costs were the key factor weighing on the bottom line.  This is likely to change as cotton remains at elevated levels.  Recall that Levi’s and Dockers are in the midst of rebranding efforts.

   

Sears Opens More In-Store Toy Shops - Sears is opening 79 additional Toy Shops within its stores, including in new markets Minneapolis, Philadelphia, San Diego and Washington, D.C. The expansion is based on a successful pilot launch last year. The year-round in-store Sears' Toy Shops will carry offerings from Fisher-Price, LeapFrog, Hasbro, Bakugan and VTech, as well as specialty items. The latest openings will bring the Toy Shop count to 99. The shops measure approximately 1,500 to 1,800 square feet. <licensemag.com>

Hedgeye Retail’s Take:  Sears continues on its trend of creating a mall within a mall environment.  However, toys appear to be heading for a competitive holiday following Toys R Us’ intention to open 600 pop up stores as well as Target and Wal-Mart’s intentions to be very sharp on pricing.

 

PERY Extends Nike License - Perry Ellis International has extended its license agreement with Nike, Inc. in which Perry Ellis will continue to design, produce, manufacture and distribute select apparel and swim equipment within North America under the Nike Swim brand through 2014.  <sportsonesource.com/>

Hedgeye Retail’s Take:   Status quo here with the swim license which means much more to PERY than it does to NKE.

 

Fila USA to Sell Women's Body Toning Workout Apparel - Fila USA announced the release of the Fila Body Toning System (BTS), a collection of body toning workout apparel for the women's fitness industry. The Body Toning System will first deliver to Dick's Sporting Goods stores and athletic specialty stores in early October. <sportsonesource.com>

Hedgeye Retail’s Take: While late to the toning shoe game, Fila becomes the first on shelves with a complimentary apparel product. With women now frequenting the athletic channel with increased frequency, retailers are likely to quickly adopt (or at least try) early toning apparel offerings in an effort to up-sell and retain new incremental female customers. Next in line is Reebok Easy Tone apparel in stores come November just in time for the holidays.

 

Fast-Fashion Flocks to India - Fast-fashion and contemporary brand retailers are flocking to India to tap into the nation’s rapidly growing economy and a market comprised of millions of young people. The latest is Forever 21, which opened its first store in India at the Ambience Mall here late last month, with a long line of customers waiting outside, impatient for the doors to be thrown open. Forever 21 joins the likes of Diesel, Zara, Ecko Unltd. and Italy’s OVS Industry. Other brands that made their entry into India earlier this year include Vero Moda and Seven For All Mankind. Over the last few years, Promod, Calvin Klein and S. Oliver have been establishing their stake in the metro cities. Meanwhile, well-entrenched brands like Van Heusen still see room for substantial expansion. What comes next? The entry of Gap is awaited, particularly in light of its plans to launch in China later this year. The frequency of purchase is highest among younger consumers. More than 81% of India’s population is under 45, and these consumers are the most fashion conscious. <wwd.com/retail-news>

Hedgeye Retail’s Take: Clearly an attractive market for retailers, but the key force tempering foreign direct investment continues to be Indian reform. Expect more aggressive entry by retailers as the government opens its gates further.

 

Russian Footwear Demand Recovers, 83% of Imported Shoes From China - Although footwear consumption in Russia is relatively smaller than those in European Union and the US, demand has been recovering, with China supplying 83% of imported shoes to the country. According to a recent survey conducted by Discovery Research Group, the average annual shoes consumption is 1.4 pairs for Russian, whereas 4.5 pairs for other European and 6.5 pairs for American. The imports in 2009 grew 22.3% to 222.1 million pairs from a year earlier. The average price for imported a pair of shoes was US$10. In terms of value, shoes consumption in the first quarter of 2010 increased 15% to 20%. Industry experts said that shoe demand in Russia is recovering, with prices also being on the rise. <fashionnetasia.com>

Hedgeye Retail’s Take: A population half the size of the U.S., but footwear consumption only ~20% of the American consumer suggests a capacity for increased demand. With the country’s GDP running +5% and an ASP of only $10 expect footwear demand trends to closely follow that of oil prices in the near-to-intermediate term.


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