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DRI: IDEA ALERT

Takeaway: If $DRI breaks $51.56, look out below. Industry data are not hinting at any sales recovery in casual dining.

Keith added a short position in Darden Restaurants (DRI) to the Hedgeye Virtual Portfolio today.  As we discuss below, our fundamental view on the stock, along with recent industry data, corroborates with his quantitative view of the stock.  For our recent Darden Black Book, please email us.

 

Quantitative Setup

 

Darden is immediate-term TRADE overbought with TREND support at $51.56.  If that line does not hold, the stock will likely drop to the low $40’s in short order.

 

DRI: IDEA ALERT - DRI levels

 

 

Fundamental Perspective


Our view on Darden is predicated on the company’s focus on growth at a time when its two most important revenue drivers (Olive Garden and Red Lobster) are producing sustained traffic declines.  Multi-brand restaurant companies typically historically encounter difficulty when attempting to grow brands with weak fundamentals.  The company is using its balance sheet to grow what are currently poorly performing concepts.  Should the dividend come under threat, we believe that could force an entire constituency of shareholders to reconsider their positions.  Below are some of the concerns we have about Darden from a fundamental perspective:

  • Anemic sales trends at Olive Garden, Red Lobster
  • Focusing on growth rather than remedying issues at OG & RL
  • Capex growth outstripping sales growth
  • The company is burning cash
  • Maintaining the dividend, growth profile, and operating margins not possible with current fundamentals
  • Difficult macro outlook is not encouraging
  • Absent a resurrection in sales trends, we believe downside in stock is significant (to $43)

 

Industry Data Shows No Resurrection in Sales

 

We are non-believers in an Olive Garden or Red Lobster sales resurrection.  Industry data is indicating that no such sales recovery is happening. 

 

Malcolm Knapp released his estimates for July's Knapp Track Casual Dining Same-Restaurant Sales Index. Comparable sales grew 0.6% versus July '11 while traffic declined -1.8%.  On a sequential basis from June, July’s estimates imply a sequential deceleration in two year average trends of -80bps and -45bps for comps and guest counts, respectively.  This is not encouraging for Olive Garden or Red Lobster, both of which have had difficulty growing guest counts versus the industry over the last few years.

 

The Black Box Intelligence casual dining same-store sales data also implied a slowdown, on a sequential basis, in growth from June to July.  Comparable sales growth in July was 0.8% while traffic declined -1% year-over-year compared to the -0.6% slowdown in June.  

 

Our takeaway from the Knapp Track data is that a sales pick up at Olive Garden and Red Lobster is unlikely.  The Black Box data seems to be confirming this, from an industry standpoint, and we remain bearish on Darden at this price.

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 

 


Idea Alert: UA

Takeaway: Recent bearish developments won't impact UA's numbers near-term. We still like it long.

 

Keith added UA to the long side of the Hedgeye Virtual Portfolio as a TRADE. The resignation of UA’s SVP of sourcing and the developments at JJB are not bullish, but they will not impact UA’s numbers near-term, nor do they pose enough of a challenge to offset the company’s ability to capture the long-term opportunity before it. We’ll buy on red. Though this is one of our favorite TAIL ideas, look for us to keep a TRADE a TRADE on this one.

 

Idea Alert: UA - UA TTT

 


KORS: The Unshortable Stock

Takeaway: KORS is having a fantastic year and growth is through the roof. The company is expanding in both the US and in Europe which is no easy task.

Hedgeye's Retail teamhas been agnostic on Michael Kors (KORS) since we issued a Blackbook on the stock back in March. However, based on yesterday’s +16.4% rip in the stock, we can no longer stand on the sidelines. We are deeming KORS an unshortable stock. This company is golden.

 

At $49 a share, some might call KORS expensive. We call that poppycock. This company is on fire. Strong numbers all around, P&L is on fire, and the company is ripping market share from competitors, including Coach (COH), which we continue to remain bearish on. Check out the growth in KORS versus COH below:

 

 

KORS: The Unshortable Stock  - KORSCOH

 

 

The story for 2013 remains positive for KORS. This is one of the few companies that has strong European growth on top of US growth – a rarity in this day and age. While we like KORS, we’d still rather buy Fifth & Pacific (FNP).

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.61%

CPI DATA SHOWS TOUGH PRICE ENVIRONMENT

Takeaway: Price elasticity of demand at QSR is likely higher this year as grocery inflation slows. $MCD and others have little room for further hikes

Inflation in the grocery aisle is decelerating rapidly.  We continue to see this as an impediment for restaurant companies seeking to protect margins via raising prices.  The Bureau of Labor Statistics released CPI data for the month of July this morning.  The negative spread between CPI for Food Away from Home and Food at Home continues to grow.

 

In 2011, grocers were forced to raise prices in line with inflation to protect margins.  We believe that the restaurant industry benefitted greatly from the relatively benign level of inflation for Food Away From Home versus Food at Home. 

 

Looking ahead, we believe that several companies in the restaurant industry will find it increasingly difficult to lap difficult compares over the summer months if the “food value spread” continues to widen.  Management teams at McDonald’s and Jack in the Box, among others, have highlighted this metric as being instrumental in their pricing strategies.  MCD, for instance, is running price in the U.S. at roughly 3%.  With Food at Home CPI decelerating, we believe the consumer may be less willing this year, as compared to 2011, to absorb additional price increases.

 

CPI DATA SHOWS TOUGH PRICE ENVIRONMENT - food at home vs food away from home cpi

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Golf Claps For Mao

GOLF CLAPS FOR MAO

 

 

CLIENT TALKING POINTS

 

GOLF CLAPS FOR MAO

China gets us thinking. It is a country that truly puts the brain to work. While getting coffee with a friend this morning, we pondered just what makes China tick. The provincial governments, the “second” balance sheets – can you trust ANYTHING coming out of this country? The consensus in the West is that China will cut rates! It will provide stimulus! Then the People’s Bank of China comes out and says no, they’re not going to do any of that nonsense. They don’t need Keynesian economics driving up food and fuel prices any further. Oh. Well then that would explain why China stocks continue to crash, down -2% this week.

 

 

MY DEAR MERCUTIO

Shakespeare was a man of tragedy. Come to think of it, the guy was just downright depressing. Hamlet? Macbeth? Romeo and Juliet? Death all around! Kind of reminds us of the stock market. Yeah, it’s cool to be a bull these days with the levels the SPX and Dow are at, but is this sustainable? We don’t think so. Economic numbers and news are going to get worse, not better. This coincides with our #GrowthSlowing theme that we’ve been pushing for some time now. Bailouts and higher commodity prices are certainly not the answer to our woes – everyone can agree with that.

 

 

GET THE DOLLAR RIGHT…

…and you get a lot of other things right. We’ve said this before. And after a nice multi-week fall, the US dollar is now heading to the upside. As a result, the SPX hasn’t gone up in two days. Europeans are playing the quiet game, so what are you going to do for a catalyst? Not even Hilsenrath can spin this one. Instead, let’s see what Romney and Ryan can do to shake up the market over the weekend. Who knows what these two are capable of? It’s certainly better than a President who goes around buying Bud Lights for everyone (and by everyone, he meant the first ten people to bumrush the beer booth). $25,000 down the hole.

 

More info on ‘Bama Beers here: http://www.indystar.com/article/20120815/NEWS01/120815013/Owner-complains-Obama-s-beer-tent-stop-cost-him-25-000

 

_______________________________________________________

 

ASSET ALLOCATION

 

Cash:                  Flat

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  Flat

 

Int'l Currencies: Flat   

 

 

_______________________________________________________

 

TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“rhetoric is QE” -@fearlicious

 

 

QUOTE OF THE DAY

“Why be a man when you can be a success?” – Bertolt Brecht

 

 

STAT OF THE DAY

The Carlyle Group is looking to buy Getty Images for $3.3 billion.

 

 

 


THE M3: LA SCALA PROJECT INVALID; PAWNSHOPS; SINGAPORE HOME SALES SURGE

The Macau Metro Monitor, August 15, 2012

 

GOVERNMENT ACES LAND-LEASE DEALS FOR LA SCALA PROJECT Macau News

Chinese Estates Holdings said in a statement last night that Macau government has decided to “invalidate” the land-concession contracts and related March 2006 amendments concerning its subsidiary Moon Ocean. According to the statement “the chief executive of Macau has declared the previous act of the chief executive of Macau in confirming the approval of the land transfers and the related amendments of the land concession contracts in March 2006 invalid.” 

 

The land concession in dispute concerns 5 plots of land near the airport in Taipa that were slate for the company’s luxury La Scala residential project.  The head of Chinese Estates Holding, Hong Kong developer Joseph Lau Luen Hung, is slated to stand trial for alleged bribery in a Macau court next month. 

 

MACAU PAWNSHOPS: TO PAWN AND TO BE A PAWN Macau Daily Times

Pawnshops, whose fortune is linked to gaming in Macau is a good barometer of the industry's health. According to one pawn shop owner, “In the (2008) international financial crisis, we were very much affected, and some smaller pawnshops were on the brink of closure. Individual ones even suspended their business temporarily. Now the visitor numbers and casino revenues are slowing down again, we hope it doesn’t last long this time.” 


SINGAPORE PRIVATE-HOME SALES SURGE 41.7% ON MONTH IN JULY Dow Jones Newswire

According to government data, sales of of new private homes in Singapore surged 41.7% MoM in July, reversing the sharp declines seen in May and June. 1,943 units, excluding executive condominiums, were sold in July compared to 1,371 units in June.  

 

Analysts believe the the rebound in July sales was caused by seasonal factors such as the desire to close transactions ahead of August, known as the quiet "Hungry Ghost" month and lower prices in some segments of the market. Development units priced below S$1,000/SQFT were among the strongest sellers. 

 

It appears that homebuyers are showing interest in more modestly priced condominium launches.  Despite the recently transaction volume volatility, analysts believe that will remain at a steady pace for the balance of the year. 


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