DRI STILL RIDING OUT THE STORM

In 2009, at the height of the financial crisis, the theme of the Darden Analyst Meeting was “Riding Out The Storm”.  The company could recycle that theme for this year’s Analyst Meeting but the company’s recent troubles have been self-inflicted. 

 

This morning, Darden guided to 3Q EPS of $1.00-1.02 versus the Street at $1.12.  We continue to expect EPS of $3.00 for FY13 versus $3.39 consensus.  The table below highlights the shortfall, in terms of consensus, of the pre-released same-restaurant sales results released by Darden this morning. 

 

DRI STILL RIDING OUT THE STORM - dri sss vs consensus

 

 

Capital Allocation

 

For a company of Darden’s size, following a growth mandate, it’s important for the company’s shareholders that the Return on Incremental Invested Capital metric is not declining steadily over time.  As the chart below illustrates, that has been the case.  For our position on the stock to change, we would need to see a stop to the growth of The Olive Garden and Red Lobster concepts and a slowing of the growth of LongHorn Steakhouse.  This will enable management to improve operations and restaurant-level performance.  We estimate that, since the end of 2009, Darden has spent over $2.35 billion in CapEx to generate only $198 million in incremental EBITDA.  That is not sustainable and shareholders should be seeking a change in philosophy from management: from “growth” to “prudent capital allocation”. 

 

DRI STILL RIDING OUT THE STORM - DRI ROIIC

 

 

Cutting the Fat

 

Darden has a hefty corporate structure, which is appropriate given that it manages over 2,000 restaurants within eight different concepts.  In trying to gauge whether or not the company is run efficiently, we have considered SG&A spending per store versus other operators within the industry.  While the G&A of Brinker may not be completely comparable to the SG&A line item of Darden, it is interesting to note that the aforementioned line item of Darden’s, on a per store basis, is almost twice that of Brinker, also on a per store basis.  If Darden can approach the efficiency level of Brinker in terms of its SG&A spending, we estimate that the benefit could be as much as $400 or $2.25 per share.

 

 

Whale Hunting Private Equity Firms

 

If difficult decisions are not made, it is likely that this company ends up in the hands of private equity with the company being broken into two pieces: Olive Garden and Seasons 52 (Italian) and Red Lobster, Eddie V’s and LongHorn (Steak and Seafood).  The other brands would likely be sold with Yardhouse going public.  To-date, there has been little pressure on management from shareholders to make any difficult decisions but, as the stock price goes lower, pressure is sure to follow.

 

 

The Upcoming Analyst Day

 

We are expecting management to stick with the party line during the Darden Analyst Meeting next week:

  • New Menus at Red Lobster and The Olive Garden
  • Remodel initiatives at The Olive Garden
  • Discounting
  • New leadership at the brand level
  • Inflation expectations
  • Growth initiatives
  • Supply chain efficiencies

 

We will know more about management’s vision for the future next week.  Unfortunately for those that own the shares, we don’t anticipate an increased focus on the core business and the issues therein.  We expect $3.00 in EPS for FY13 versus consensus of $3.39.  The road to recovery is not going to be easy for Darden but getting serious about fixing the core business is the sign that they are on the way.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more