Keith shorted DRI this year as his quantitative analysis lined up with one of the most important calls we made in 2012.
Darden remains one of our top ideas on the short side. Company- and industry-specific issues that we highlighted in our July black book, “DRI: THE UNTHINKABLE SHORT CASE”, are coming to the fore.
- Industry trends are slowing (see Knapp Track chart, below)
- Darden likely needs a recovery in industry trends to achieve its targets of 1-2% SRS growth at Olive Garden, Red Lobster and LongHorn (again, see Knapp Track chart, below)
- Darden’s two most important chains, Olive Garden and Red Lobstser, continue to underperform versus the industry
- With jobless claims and difficult comparisons versus a year ago (weather) over the next few months, we are not expecting much good news on Darden’s top-line
- The company’s CMO leaving is a negative, particularly seen as the management team did not announce a replacement. Marketing is a key factor in driving traffic in casual dining and this news only adds to our bearish view of Darden’s sales outlook
- While earnings expectations continue to decline, we believe the Street’s expectations remain too bullish on this name
- The company's growth, dividend payments, and share repurchases are becoming more and more difficult to sustain under the company's current path.