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    MARKET EDGES

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DRI continues to be view as the “safety trade” in casual dining due to the stability of its core brands, strong financial characteristics and seasoned management team.    

Being one of the companies in the restaurant industry that has some of the most “mature” brands, DRI incremental sales drivers are very sensitive to the performance of the quarterly promotions and limited-time offers.  In addition, we are in a very value-sensitive environment and the consumer has many choices from which to choose. 

DRI has a demonstrated over time that management has proven to be able to build their brands using LTO’s effectively, but they are not perfect.   Last quarter, the Olive Garden top line performance suffered from the shrimp and ravioli promotion falling afoul of guest preferences; this led to a negative menu mix in February.  According to management, the shrimp dish was a little too “culinary-forward” and didn't drive the same level of incremental guests as did the ravioli promotion with the $10.95 price point in 3Q10.  In 4Q10, The Olive Garden kept with a “culinary-forward” feel promoting the Culinary Institute of Tuscany (CIT) Soffatellis followed by Pastachettis. 

With expectations for Olive Garden performance lowered due to 400 underperforming stores that are awaiting a fresh look, Red Lobster (and Long Horn) must pick up some of the slack if management is going to hit its stated goal of 1.5% to 2% same-store sales in FY11; with the lower end being more likely.  Management’s bullish view of the top line is based partly on a continued improvement in the broader economic climate, especially in terms of employment, which has certainly not materialized.

In 4Q11, Red Lobster will benefit from the timing of Lobster Fest and the Create Your Own Shrimp promotion.  This brings me to Red Lobster and the current LTO, which appears to have an extremely compelling price point.  The “$15 Seafood Feast” includes soup, salad, entrée, dessert and unlimited Cheddar Bay Biscuits and runs from May 31st through July 25th.  In 3Q11, same-store sales increased 0.1% at Red Lobster (despite the adverse impact of 120bps related to the timing of Lent and their signature Lobster Fest promotion, and another 50bps of winter weather issues).  It would appear that the current promotion is accomplishing one of management’s stated goals of “price certainty” for the Red Lobster guest.

The $15 price point compares to the $19.75 average check, which includes lunch. This implies that the average check at dinner is likely closer to $25.  The issue Red lobster faces with this promotion will be the level of customer preference for the highly compelling $15 price target at a time when inflation is impacting the company’s margins, particularly in sea food.  There is clearly potential for a significant decline in average check.

DRI - INTERMEDIATE TERM ISSUES - OG pod 1

DRI - INTERMEDIATE TERM ISSUES - RL pod 1

DRI - INTERMEDIATE TERM ISSUES - LH pod 1

Howard Penney

Managing Director