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Darden is down today on the company issuing EPS guidance for 2QFY12 of $0.25-0.26.   We have been bearish on DRI since July and we believe the indications are that our thesis is playing out.


Tectonic Shift in Expectations


Based on poor results for 2QFY13 to-date, Darden revised its FY13 combined U.S. same-restaurant sales growth (OG, RL, LH) guidance from +1-2% to -1% this morning.  Sales growth guidance for the year was lowered to 7.5-8.5% versus 9-10% prior while EPS guidance was lowered to $3.29-3.49 versus $3.76-3.90 (consensus is at $3.87).





No Easy Way Out


CEO Clarence Otis, commenting in this morning’s release, stated that the quarter’s offers were “largely consistent in nature with what we've promoted successfully in the past” but that the promotions “not resonate with financially stretched consumers as well as newer promotions from competitors”. 


We continue to hear the same messages from management as its hit-and-miss top-line record continues.  In fact, as we stated in our Black Book in July, “lately, it has been more miss than hit”.   More promotion-dependant sales are failing to provide the consistency that investors are seeking in a stock with Darden’s reputation.  The CMO leaving in November was a sign that things were not going too well



Pleasing All of the Investors, All of the Time


One of the core facets of Darden thesis has been that it is improbable that the company can continue to appeal to such a wide array of investors through such a wide array of attributes.  Financing unit growth at a time when the existing system’s performance is less-than-reassuring seems to be an attempt to be everything to everyone: paying dividends, buying back stock, and continuing to grow while maintaining a strong balance sheet. 


We believe that Darden’s true free cash flow (CFO less capex, dividends, buybacks) will remain under pressure.  A reduction in the company’s dividend could be forthcoming absent a turnaround at its largest two chains, Olive Garden and Red Lobster. 


Our contention has been, and remains, that management is focusing on too many things at once.  A la Brinker in 2010, we would like to see this company focus on attacking the middle of the P&L.  Until then, we are likely to remain bearish but will be publishing more on this stock, and casual dining, in the coming days.







Howard Penney

Managing Director


Rory Green









Buy Consumer: SP500 Levels, Refeshed

Takeaway: If oil (and food) continues to deflate, consumers get a real-time tax cut. That’s bullish, for consumers.

POSITIONS: Long Consumer Discretionary (XLY), Short Industrials (XLI) and Utilities (XLU)


I have no idea what the next government catalyst is going to be, but those who begged for more government have no business whining about it.


The only thing I know is that if oil (and food) continues to deflate, consumers get a real-time tax cut. That’s bullish, for consumers. Period.


Across our core risk management durations, here are the lines that matter to me most:


  1. Intermediate-term TREND resistance = 1419
  2. Immediate-term TRADE support = 1404
  3. Long-term TAIL support = 1366


In other words, if 1404 holds, a re-test of 1419 on the upside is probable. A close above 1419 would be explicitly bullish. On the downside, if 1404 doesn’t hold, it’s a long way to 1366. But that long-term TAIL support is good to have underneath.


Keep moving out there,




Keith R. McCullough
Chief Executive Officer


Buy Consumer: SP500 Levels, Refeshed - SPX

HMA: Truth Be Told?

The 60 Minutes investigation into healthcare costs has thrust Health Management Associates (HMA) into the spotlight. The report alleges that HMA pressured doctors to admit as many patients as they could regardless of actual medical needs. It also states that nearly half of the company’s revenue comes from Medicare and Medicaid.



HMA: Truth Be Told?  - ERvisits



Overall, 12.9% of emergency room visits are admitted to a hospital. That percentage encompasses different patients, payor types and other factors that vary greatly. HMA’s admissions target rate is 20%, nearly double the industry norm. Evidence shows that the company pushed its doctors to find reasons to admit patients regardless of their medical condition. Computer programs automatically admitted patients and ordered tests before being seen by a physician. HMA says that their admission rates are near or below the industry average.


HMA’s stock hasn’t been affected by the investigation but that can easily change if the allegations have legs. Hedgeye Healthcare Sector Head Tom Tobin notes that the government will have a tough time proving HMA is guilty but if successful, the company will face an enormous fine:


“Medicare billing fraud under FCA regulations carries a 3X damages award plus a civil charge per case, which quickly spins into A LOT OF MONEY if HMA is found to be guilty.” 


Early Look

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Repairing The Eurozone

The sovereign debt crisis in the Eurozone has cooled off in the mainstream media lately, but the situation is far from being fixed completely. 10-year bond yields have declined significantly from the heightened levels experienced in June of this year. Greece, Portugal and Italy remain the biggest at-risk countries for investors and Germany and France continue to plow forward without any hiccups. Keep an eye on maturing debt for various countries in 2013 as some (particularly Italy) have nasty situations they must face.


Repairing The Eurozone - EuropeRates

Risky Business

Client Talking Points

Trading The Range

We have a method here at Hedgeye and we stick to it. It creates order and discourages chaos in a market where chaos can be the norm. An important part of our method is trading the risk and the range. That means we determine the risk involved with a trade and set ranges we’re comfortable trading. For instance, our risk range for the S&P 500 this morning is 1404 and 1419. The former is support where we think it’s a good idea to buy and the latter is where we’d sell at. Our levels change as the market changes, but if we stick to the plan, we won’t get burned. 

Bad Company

The corporate earnings environment looks dreadful as we close out 2012. Our theme of #EarningsSlowing has never been more relevant as the Q4 earnings come in. Want to know how bad it is out there? Keith breaks it down for us:


1.       For Q4 2012 so far, 78 companies have issued negative EPS guidance (29 companies have issued positive EPS guidance)

2.       That means 73% (78 out of 107) of the companies that have said something, said something negative, on the margin

3.       73% = 2nd highest percentage of companies issuing negative EPS guidance since FactSet began tracking the data in Q1 2006

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

New unit openings in China and strength in YRI and US should offset China weakness in 1H13. China SRS growth is sensitive to the economy but new unit growth and ROIIC are likely to be supported by continuing growth of the consuming class in China. Looking at operating income by geography for YUM/MCD/SBUX, we can see that YUM is the most geographically diverse. This is manifest in YUM’s more stable EPS growth and price performance over the last 10 years.




Uncertainty in US from a macro perspective (jobless claims uptick) gives us pause from TRADE perspective although coffee prices will serve as a tailwind going forward. Company is becoming more complex, taking on risk as it acquires new brands. Longer-term, we view Starbucks, along with YUM, as one of the most attractive global growth stories in our space.


We believe ASCA is greatly undervalued due to its potential to follow a OPCO/PROPCO model like PENN in two years or so. A high FCF yield and a healthy balance sheet make this gamer an attractive investment.

Three for the Road


“Brazil NOV Exports: -6% YoY from -1.7%, global #GrowthSlowing” -@KeithMcCullough


Australia's central bank cuts benchmark interest rate by 25 basis points to 3%.


“Experience is that marvelous thing that enables you to recognize a mistake when you make it again.” -Franklin P. Jones

Expert Call; What's Next For Agricultural Prices?

Expert Call; What's Next For Agricultural Prices? - Ag.Call


Restaurant Tickers Affected:



Food Processing Tickers Affected:



On Tuesday, December 4th, at 11:00am EST the Hedgeye Macro Team and Restaurants Team will be hosting an Agricultural and Consumer Economics Expert Call with Professor Darrel Good of the University of Illinois. Good has been part of the faculty since 1976 and took part in developing a comprehensive farm risk management website (www.farmdoc.uiuc.edu). His efforts are now focused on the performance of grain futures contracts as well as corn and soybean yield trends.


Please dial in 5-10 minutes prior to the 11:00 EST start time using the number provided below. If you have any further questions email 


Please dial in 5-10 minutes prior to the 11:00 EST start time using the number provided below. If you have any further questions email 

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 611762#


Topics will include: 

  • Supply side - planting intentions and farmer's economics
  • Demand side - key drivers of demand - ethanol, protein, consumption (domestic and abroad)
  • General long-term trends to think about for farming - utilization, fertilizers, seed evolution
  • Thoughts on USDA projections, and their historical accuracy and what the implications are now
  • View on supply, demand, key drivers and prices for:
    • Corn
    • Wheat
    • Soybeans
    • Cattle
    • Chicken  


Good's Background


Darrel Good has a comprehensive understanding of the agricultural markets and economic implications. "There was a time period in the early seventies when grain markets changed dramatically," said Good. "Russia started importing grain, prices just exploded to the upside and there was renewed interest in markets and prices. I was hired to help develop a very extensive educational program in marketing and risk management."  

  • Professor in the department of Agricultural and Consumer Economics, is marking his 33rd year with the University of Illinois
  • Good and two other faculty members developed a seminar called "Price Forecasting and Sales Management"
  • One of the founding members of the farmdoc team
  • He writes one of the featured newsletters on the farmdoc site, Weekly OUTLOOK , and he is a primary contributor to the AgMAS section
  • Current research includes:
    • Evaluation of the pricing performance of agricultural market advisory services
    • Evaluation of USDA production and price forecasts
    • Evaluation of pricing performance of Illinois corn and soybean producers  


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