Takeaway: With one statement - “we have been too protective about our margins” - the management of Darden declared war on casual dining.

With one statement - “we have been too protective about our margins” - the management of Darden declared war on casual dining. This not going to end well for anybody, but DRI has the most to lose.


Going forward, all of DRI advertising spending will focus on price point promotions and move away from “brand building” initiatives. Knowing what we know now, it looks clear why the company’s CMO jumped ship last month! Consumers will definitely “sea food” differently.


We believe that the company is taking a very big risk on the future of the company and there is a better-than-average chance it could end up being pivotal moment for the casual dining industry. We already know that the Red Lobster customer is transitory and only coming back consistently when the food is on sale; now the company will be training the Olive Garden customers to behave the same way. This is a difficult habit to coax consumers out of, once they have attained it. As our Chief Compliance Officer, Moshe Silver, likes to say, “it is much easier to make a mess than it is to clean it up”.


The company will be adding another 100 new store to this potential mess in FY2013 and likely another 90-100 in FY2014!


The massive discounting strategy they conveyed to the street is reactionary and defensive. We believe there are several important issues to consider when assessing the current strategy:


1. LACKING CREDIBILITY: Over the last two years DRI senior management team has proven they are not in sync with what the consumer wants!

2. CART BEFORE THE HORSE: DRI has not fixed the cost structure of the company, especially the middle of the P&L (food and labor costs) to effectively compete at lower price points.

3. NO PRICING POWER: Once you go down the road of discounting, it is difficult to turn back. Future inflation in input costs is felt more acutely as discounting increases.

4. MARGIN: How much margin will they need to give up before they see a sustained improvement in traffic? Do they have the ability to predict consumer behavior around the current promotions?

5. BLOATED COST STRUCTURE: As a multi-brand restaurant company DRI carries significantly more infrastructure and growth related expense. It should also be noted that the top six executives at DRI took home over $23 million in compensation.


In FY1H13 DRI earned $1.13 on $3.994 billion in revenue. So what does the company strategy of significant discounting mean for FY2H13? We have the company earning $2.00 on $4.485 billion in revenues. The street consensus is for the company to earn $2.27 on $4.60 billion in revenues. As we have seen over time with DRI conformation bias exists in the numbers; the street has historically given management the benefit of the doubt. We are taking the other side of that trade.


Bottom line, we think uncertainty overwhelms the ability of the street or the company to know how this new tack will be reflected in the company’s results. We would suggest that more pain than expected, not less, is likely before the company’s repositioning is complete.


In six months, every management team in the casual dining space is going to be wishing that DRI would go back to raising prices 2-3% every year and driving customers away!


Howard Penney

Managing Director


Rory Green

Senior Analyst



Trade Of The Day: PNK

We shorted Pinnacle Entertainment (PNK) today at $16.08 a share at 2:53 PM EDT in our Real-Time Alerts. The company announced this morning that it would acquire Ameristar Casinos (ASCA) for $869 million. Deal risk remains as we believe Pinnacle will have a difficult time completing the deal with Ameristar. For now, we'll stay bullish on ASCA while shorting the acquirer PNK. 


Trade Of The Day: PNK - TOTD

PCAR: Momentum Building

Takeaway: Data suggest that the Class 8 market is improving from a trough in August. $PCAR should benefit from a better market and $NAV share loss.

PCAR: Momentum Building


  • Backlog to Build Ratio:  We showed in our August 2012 Black Book on Truck OEMs that a low backlog to build ratio was typically a decent buy signal for the group.  While the backlog to build ratio has improved since the August trough, the ratio remains very low.  We continue to believe that shares of PCAR would benefit from market normalization.

PCAR: Momentum Building - t1



  • Order Rates Below Replacement Demand:  Truck owners appear to be hanging on to pre-2007 trucks because those trucks have fewer costly emission controls.  Unless Class 8 trucks are leaving North American roads, order rates will need to rebound at some point.  

 PCAR: Momentum Building - t2



  • Navistar Share Loss:  While industry metrics may still be weak relative to steady state demand, we expect PCAR and Daimler to perform better than the industry as they gain share from Navistar.  Navistar has given up a huge amount of market share in Class 8.  If sustained through 2013, Navistar’s loss should be a significant benefit to competitors.  All else equal, share gains for PCAR could drive double digit 2013 growth in North American Class 8, PCAR’s most important market.

 PCAR: Momentum Building - t3



  • PCAR a Top Long Idea:  We continue to believe that PCAR is a top long idea in the Industrials sector.  While the shares have outperformed since August 2012, our thesis appears to be tracking well.  Near-term, PCAR should benefit from Navistar’s share loss.  Longer-term, we expect a construction rebound, market entry in Brazil, a more stable truck demand environment and an aging truck fleet to benefit the firm’s bottom line.


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The Economic Data calendar for the week of the 24th of December through the 28th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.



Weekly European Monitor: Monti Out, Vacuum In

-- For specific questions on anything Europe, please contact me at to set up a call.


Asset Class Performance:

  • Equities:  The STOXX Europe 600 closed up +0.6% week-over-week vs -0.4% last week. Top performers:  Greece +4.6%; Romania +3.9%; Spain +3.3%; Czech Republic +2.8%; Italy +2.7%; Poland +1.2%; Portugal +1.2%. Bottom performers:  Cyprus -3.4%; Latvia -0.9%; Estonia -0.4%; Denmark -0.4%; Switzerland -0.2%.  [Other: Germany +0.5%; France +0.5%; UK +0.3%].
  • FX:  The EUR/USD is up +0.11% week-over-week vs +1.81% last week.  W/W Divergences:  SEK/EUR +1.67%; NOK/EUR +0.61%; RON/EUR +0.57%; CZK/EUR +0.30%; DKK/EUR +0.00%; CHF/EUR +0.00%; PLN/EUR -0.13%; GBP/EUR -0.18%; RUB/EUR -0.50%; TRY/EUR -1.19%; HUF/EUR -2.10%.
  • Fixed Income:  The 10YR yield for sovereigns across the periphery were down week-on-week. Greece declined -110bps to 11.89% and Portugal fell -23bps to 7.01%, and Spain lost -15bps to 5.25%, and Italy fell -17bps to 4.47%. The UK gained 3bps to 1.89% and Germany gain +2bps to 1.38%.

Weekly European Monitor: Monti Out, Vacuum In - 22. yields



EUR/USD: Our TRADE range is $1.31 – 1.33

  • Our call - the EUR/USD will trade within our quantitative levels and reflect much of the daily headline risk (from Spain, Greece, and Italy in particular), however the ECB President Mario Draghi’s September announcement that “the ECB is ready to do whatever it takes to preserve the euro” and the resolve of Eurocrats to maintain the Union will prevent levels falling anywhere near parity.
  • We expect a long road towards a fiscal union as states will be reluctant to give their sovereignty up to an external entity, which should limit the cross’ upside.
  • The cross could weaken alongside the ECB showing some willingness to cut the benchmark interest rate.

Weekly European Monitor: Monti Out, Vacuum In - 22. eurusd



Monti Out, Vacuum In:


As we head into a quiet holiday week the major call-out for a second straight week is that European equity and credit markets mostly melted higher. While fundamental data is far from showing a resounding inflection in trend, we are signaling in our research a shift from #SlowingGrowth to #StabilizingGrowth.


There are numerous Call-Outs (see the section below) this week across the region. To highlight, we see yet again countries reducing their growth estimates for 2013 (Sweden) and the inability of countries, mostly peripheral, to reach deficit targets (Spain). These data point continue to strengthen our call that growth will remain weak throughout the Eurozone for a protracted period. This week we saw actions from the central banks of Sweden, Turkey, and Hungary to cut interest rates by 25bps to spur on growth.


We remain aware that “risk” has largely abated across Europe (especially the periphery) since the summer and particularly following Mario Draghi’s September ECB statement (9/6) to buy “unlimited” sovereign debt via the OMT program. However, we opportunistically see areas to short markets – Italy in particular – where we believe the market has gotten ahead of itself.  We see risks rising with both the power vacuum created with PM Monti’s resignation (called today following 2013 budget approval) and a new election in mid to late February coupled with Italy’s high debt to GDP ratio (120%). For more on Italy see our note yesterday titled “Italy’s Uneven Footing”.



The European Week Ahead:

Sunday: Dec. UK Hometrack Housing Survey


Monday:  Stock exchanges are closed in Switzerland, Germany, Greece, Denmark, Finland, Norway, Sweden, Austria, and Italy. A half day will be observed in France, Portugal, Netherlands, Belgium, U.K., Ireland, and Spain; also in the U.S.


Thursday: Dec. UK House Prices (Dec. 27-31); Nov. UK BBA Loans for House Purchase; Dec. France Consumer Confidence Indicator; Nov. France Producer Prices, Total Jobseekers; Oct. Spain Mortgages-capital loaned, Mortgages on Houses; Dec. Italy Business Confidence, Economic Sentiment


Friday: Nov. France Consumer Spending; 3Q France GDP – Final; Nov. Spain Retail Sales; Oct. Spain Current Account; Nov. Italy PPI



Call Outs:

Banking Union - Der Spiegel, citing an opinion from lawyers at the Bundesbank, reported that Germany's central bank has serious reservations about the legal framework establishing a banking union in Europe. The magazine said that after an initial review of the results from last week's summit, Bundesbank lawyers found the banking union project lacks "a sustainably sound legal basis". It highlighted concerns that supervisors' responsibilities remain unclear, along with the fact that authorities such as a planned arbitration committee between the supervisors and the ECB Governing Council were not sufficiently covered by European law.


China Sentiment - China's $482B sovereign wealth fund, CIC, said that it is "not optimistic" about the outlook for the debt crisis in the Eurozone. However, it noted that it is considering investing more if the region continues to create a friendlier environment. The article cited comments from Jesse Wang, an executive vice president at CIC.


UK - BOE voted 8-1 to leave stimulus unchanged as Euro risks receded (Miles voted for increase). 


Sweden - Hennes & Mauritz said sales growth continued to slow in the three months to end-November, though the world's No. 2 clothing retailer by revenue recorded a smaller-than-expected drop in November sales, easing fears it would be hit by a spending slowdown in Germany.


Sweden - cuts 2013 GDP growth forecast to 1.1% from 2.7% and 2014 to 3.0% from 3.7%.


France - Fitch Ratings kept the pressure on French President François Hollande, warning that it will more likely than not take away the country's triple-A rating next year.


France - French President Francois Hollande reiterated that his government was targeting a reduction of the public deficit in 2013 to 3% of GDP despite new official data showing economic growth way below forecast. INSEE said the French economy would only grow 0.1% this year, dropping from 1.7% in 2011 and missing the government's forecast for 0.3% growth. The article added that Hollande said he expected unemployment would only begin to fall by late 2013.


Spain - Spain's Santander said it would fully take over its publicly traded affiliate Banco Español de Crédito, or Banesto, in a deal that will result in the closure of about 700 branches.


Spain - Spanish banks reported that non-performing loans grew by over €7B to €189.6B in October, or 11.2% of total outstanding loans. This was up from a 10.7% bad-loan ratio in September. Bad loans have risen every month for over a year. (Loans peaked at ~€1.8T during the height of the property bubble in 2008).


Spain - Deputy Budget Minister Marta Fernandez Curras said Spain will struggle to meet its 2012 deficit target as a contracting economy hinders the impact of the deepest budget cuts in the nation's democratic history. The article noted that Budget Ministry data showed the central-government's shortfall through November was 4.37% of GDP, while Curras said the social security system was expected to register a gap of around 1% of output. The central government and social security together have a full-year deficit goal of 4.5%.


Germany - Germany's debt agency said on Thursday that the country plans to cut federal debt issuance to €250B in 2013 from €255B in 2012. The debt agency plans to issue €173B in longer-term capital market instruments and €77B in money market instruments. It also plans to issue the first common bond between regional states and the federal government.  


Germany - German deputy economy minister saying that Germany is considering cutting its 2013 growth forecast from 1.0%. 


Italy - Polls are not promising for PM Mario Monti. According to polling company SWG SpA, Monti would win at most 20% of votes in elections expected 24-Feb. The 14-Dec poll showed 61% don't even want him to run. A separate 17-Nov poll by Datamonitor showed that 62.5% of Italians had a negative view of the Monti government, 82.4% had little or no confidence in the economy improving, and 81% said they had not been able to save in the past three months.


Greece - was upgraded 6 notches by S&P from selective default to B- with stable outlook after the successful completion of debt buyback shows “strong determination” of Euro area governments to keep Greece in the Euro. 


Greece - Greece's largest banks, EFG Eurobank Ergasias SA and Piraeus Bank Sa, said yesterday they will need a capital boost in excess of €13B ($17.2B) after taking losses from the country's debt restructuring earlier this year. The article said Eurobank will need €5.8B, while Piraeus will require €7.3B. It added that the losses were in line with estimates put together by the Greek central bank. The two banks reported combined losses of €1.7B for the first nine months of the year, on high loan-loss provisions and weaker banking income.


Greece - The ECB has decided to accept again bonds guaranteed by the Greek government at its monetary policy operations, the ECB said Wednesday. The decision follows the positive assessment of Greece's reform program.


Poland - The European Commission is investigating why Poland's government is refusing to pay dozens of foreign contractors for work carried out under a road-building program worth billions of euros and backed by Europe.


Cyprus - debt cut to CCC+/C by S&P as creditworthiness has deteriorated (outlook negative).



Data Dump:


Eurozone Labor Costs 2.0% in Q3 Y/Y vs 1.9% in Q2

Eurozone Trade Balance 10.2 B EUR OCT vs 9.5B EUR SEPT

Eurozone Construction Output -4.1% OCT Y/Y vs -3.8% September


Germany IFO Business Climate 102.4 DEC vs 101.4 NOV

Germany IFO Current Assessment 107.1 DEC vs 108.1 NOV

Germany IFO Expectations 97.9 DEC vs 95.2 NOV


Weekly European Monitor: Monti Out, Vacuum In - 22. germany ifo


Germany GfK Consumer Confidence Survey 5.6 JAN (exp. 5.9) vs 5.8 DEC

Germany Producer Prices 1.4% NOV Y/Y vs 1.5% OCT

Germany Import Price Index 1.1% NOV Y/Y vs 1.5% OCT


France Own Company Production Outlook -9 DEC vs -7 NOV

France Production Outlook -38 DEC vs -42 NOV

France Business Confidence 89 DEC vs 88 NOV


Italy Consumer Confidence Index 85.7 DEC vs 84.9 NOV


Weekly European Monitor: Monti Out, Vacuum In - 11. italy confidence


Italy Hourly Wages 1.6% NOV Y/Y vs 1.5% OCT

Italy Industrial Orders -0.1% OCT Y/Y vs -12.8% September

Italy Retail Sales -3.8% OCT Y/Y vs -1.6% September


Weekly European Monitor: Monti Out, Vacuum In - 111. italy retail sales


Spain Total Housing Permits -34.3% OCT Y/Y vs -51.6% SEPT

Spain Producer Prices 2.8% NOV Y/Y vs 3.4% OCT


UK Q3 GDP Final 0.9% Q/Q vs initial 1.0%   [0.0% Y/Y vs initial -0.1%]


UK CPI 2.7% NOV Y/Y vs 2.7% OCT (highest since May)


Weekly European Monitor: Monti Out, Vacuum In - 22. uk inflation


UK RPI 3.0% NOV Y/Y vs 3.2% OCT

UK PPI Input -0.3% NOV Y/Y vs 0.0% OCT   [0.1% NOV M/M vs 0.1% OCT]

UK PPI Output 2.2% NOV Y/Y vs 2.6% OCT   [-0.2% NOV M/M vs 0.2% OCT]

UK Retail Sales w Auto Fuel 0.9% NOV Y/Y vs 0.8% OCT

UK ONS House Price 1.5% OCT Y/Y vs 1.7% September

UK Public Sector Net Borrowing 15.3B GBP NOV vs 6.0B GBP OCT

UK Total Business Investment 5.1% Y/Y vs initial 4.5%

UK Index of Services 1.1% OCT Y/Y vs 1.2% SEPT


Switzerland Exports 6.0% NOV M/M vs -7.3% OCT

Switzerland Imports 0.2% NOV M/M vs -6.9% OCT

Switzerland M3 Money Supply 9.3% NOV Y/Y vs 8.9% OCT


Ireland Q3 GDP 0.2% Q/Q vs 0.4% in Q2   [0.8% Y/Y vs -0.5% in Q2]

Ireland PPI 2.7% NOV Y/Y vs 2.9% OCT


Portugal PPI 3.8% NOV Y/Y vs 4.6% OCT

Austria Industrial Production 1.3% OCT Y/Y vs 2.0% September

Netherlands House Price Index -6.8% NOV Y/Y vs -7.8% OCT

Belgium CPI 2.23% DEC Y/Y vs 2.26% NOV


Sweden Consumer Confidence -12.2 DEC vs -7.3 NOV

Sweden Manufacturing Confidence -15 DEC vs -17 NOV

Sweden Economic Tendency 89.6 DEC vs 86 NOV

Sweden PPI -3.1% NOV Y/Y vs -2.3% OCT


Denmark Q3 GDP Final 0.3% Q/Q vs -0.7% in Q2   [-0.3% Y/Y vs -1.2% in Q2]

Denmark Wholesale Price Index 3.4% NOV Y/Y vs 3.5% OCT

Denmark Consumer Confidence -4.7 DEC vs -0.8 NOV

Denmark Retail Sales -0.5% NOV vs -1.8% OCT


Finland PPI 1.3% NOV Y/Y vs 1.7% OCT

Finland Unemployment Rate 7.3% NOV vs 6.9% OCT


Netherlands Consumer Confidence -39 DEC vs -37 NOV

Netherlands Consumer Spending -2.4% OCT Y/Y vs -0.1% September

Netherlands Unemployment Rate 7.0% NOV vs 6.8% OCT


Russia Unemployment Rate 5.4% NOV vs 5.3% OCT

Russia Disposable Income 6.7% NOV Y/Y vs 3.5% OCT

Russia Real Wages 7.3% NOV Y/Y vs 7.1% OCT

Russia Retail Sales 4.4% NOV M/M vs 4.0% OCT

Russia Investment in Production Capacity 1.2% NOV Y/Y vs 4.9% OCT

Russia Industrial Production 1.9% NOV Y/Y vs 1.8% OCT

Russia Producer Prices 6.7% NOV Y/Y vs 8.8% OCT


Poland Retail Sales 2.4% NOV Y/Y vs 3.3% OCT

Poland Avg Gross Wages 2.7% NOV Y/Y vs 2.8% OCT

Poland Producer Prices -0.1% NOV Y/Y vs 1.0% OCT

Poland Industrial Output -0.8% NOV Y/Y vs 4.6% OCT


Czech Republic Export Price Index 1.3% OCT Y/Y vs 1.4% SEPT

Czech Republic Import Price Index 2.2% OCT Y/Y vs 2.8% SEPT

Czech Republic PPI 1.6% NOV Y/Y vs 1.9% OCT


Hungary Retail Sales -3.7% OCT vs -3.1% September

Hungary Avg Gross Wage 4.6% OCT Y/Y vs 3.7% September


Slovenia Unemployment Rate 12.1% OCT vs 11.5% September

Slovenia PPI 0.7% NOV Y/Y vs 0.8% OCT

Serbia Unemployment Rate 13.9% NOV vs 13.7% OCT


Croatia Unemployment Rate 20.4% NOV vs 19.6% OCT

Lithuania Industrial Production 8.9% NOV Y/Y vs 14.4% OCT

Latvia Producer Prices 3.2% NOV Y/Y vs 2.9% OCT


Turkey Consumer Confidence 89.2 NOV vs 85.7 OCT

Turkey Unemployment Rate 9.1% SEPT vs 8.8% AUG



Interest Rate Decisions:


(12/18) Riksbank Interest Rate CUT 25bps to 1.00% [inline]

(12/18) Turkey Benchmark Repo Rate CUT 25bps to 5.50% [inline]

(12/18) Turkey Overnight Lending Rate UNCH at 9.00% [inline]

(12/18) Turkey Overnight Borrowing Rate UNCH at 5.00% [expected 25bps cut]

(12/18) Hungary Base Rate Announcement CUT 25bps to 5.75% [inline]

(12/19) Norway Deposit Rate UNCH at 1.50%

(12/19) Czech Repo Rate Announcement UNCH at 0.05%


Matthew Hedrick

Senior Analyst


What should shareholders in each company be considering?  Risk looks to the downside on PNK.





How will the market treat a Q4 miss?

  • We think PNK could report as low as $0.14 for Q4. 
  • 2013 estimates look like they need to come down from $1.01 to closer to $0.92 given poor performance of the regional markets

Probability of a competing bid from MGM or PENN or another entity?

  • PENN, MGM, and WYNN have to take a look at this deal
  • PENN can roll up ASCA into its REIT structure.  We think they could offer up to $40 per share
  • MGM has significantly more NOLs than PNK and a bigger multiple.  Could offer a little stock and mostly cash and make the deal deleveraging.  Cheaper way for MGM to de-lever
  • Given the NOLs this would be a slam dunk for WYNN as well but Steve Wynn may be reluctant to be involved in regional markets.  We've believed in the rationale of this acquisition for sometime now.
  • Obviously, any competing bid would be a hugely negative catalyst for PNK.  Unlike some others on the sell side, we wouldn’t classify a competing bid as unlikely.

What is the combined entity worth?

  • PNK currently trading at 8.0x 2013 and 7.5x 2014 EV/EBITDA
    • Looks reasonable although at the higher end of historical regional multiples
    • EBITDA growth of combined entity looks limited
  • 30% FCF yield
    • Appears very high but the combined entity is highly leveraged and free cash flow will be used to reduce debt for 4 years
    • Most of their debt is short-term variable so big interest rate risk.   Yield is likely not sustainable




Probability of a competing bid

  • PENN/MGM/WYNN could pay significantly above $26.50 and make it value added
  • We don’t believe there was a competitive bidding process so deal may have caught other casino companies by surprise

Probability of closing

  • We think absent a higher bid, the deal has a high likelihood of gaining regulatory approvals
  • The 9 month timeline looks reasonable and could even be conservative
  • If we were a shareholder we would hold out for a higher price.  We think ASCA is worth at least $40 in a REIT structure similar to the one announced by PENN.  PENN could accelerate this process by bidding for ASCA.

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