Hedgeye Restaurants Sector Head Howard Penney has been bearish on Olive Garden owner Darden Restaurants (DRI) for months now. But sometimes you have to wait until quantitative and qualitative metrics fall into place. Time and price matter in these markets and today, we’ve decided to short Darden in the Hedgeye Virtual Portfolio.
The case for Darden is that in the immediate term TRADE duration, the stock is overbought. Right now, the stock has TREND duration support (3 months or more) at $51.56. This is the line in the sand. Snap $51.56 and Darden is headed into the low $40s in rapid fashion.
Our bearish thesis on Darden focuses on its two largest chains and revenue drivers: Olive Garden and Red Lobster. Traffic at both restaurants is on the decline and are having difficulties growing their respective brands. Penney has outlined his concerns on Darden below:
• 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)
The fact that this company is busy burning cash in an effort to grow two mediocre, stagnant brands is an easy-to-spot red flag. Add in a slowdown in sales growth and same store sales and the picture becomes bleak for Darden. Again, should the stock fall through the $51.56 level, it’s going to be a messy free fall into the low $40 range very quickly.