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DRI - THE UNTHINKABLE SHORT IS NOW REALITY

Darden surprised some people today by guiding to -3%-to-+3% EPS growth in FY14 versus consensus of +11%.  We are awaiting further insight from the second day of the Analyst Meeting tomorrow but, needless to say, the Analyst Meeting, thus far, is confirming our bearish stance on Darden.

 

Email us for a copy of our original SHORT thesis black book, published in July 2012. 

 

Below are some general thoughts, with charts, on the guidance offered by management after day one.  We will have more detailed comments on individual brands and the minutiae of management’s strategy, following the second day’s presentation tomorrow.  

 

Expectations Taking a Beating

 

Darden’s share price gained on Friday as investors covered on the news that EPS guidance for FY13 was being revised to $3.06-3.22.  Consensus is now seeking $3.24 in EPS this year.  We are at the low end of the guided range.

 

During the first day of the Analyst Meeting, management gave consensus expectations another thrashing, guiding to -3% to +3% EPS growth in FY14, versus consensus of +11%. 

 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - dri eps guide

 

 

Could Go Lower – Traffic Assumptions Likely Aggressive

 

It seems to us that Darden’s management team may be overly optimistic in its underlying assumptions behind the FY14 earnings growth. 

 

Over the near-term, which we took to mean the next 2-3 years, the company is guiding to same-restaurant sales growth of 1-2%, comprised of 1% check growth, 0-1% traffic growth.  The company’s unit growth of 4% is expected to drive sales to roughly 6% per year, with the exception of FY14 when the Yardhouse acquisition should boost that number by 1%. 

 

We believe that the traffic assumptions are likely aggressive.  The past seven years have seen negative comparable traffic growth for the industry.  Looking at the trend of Darden’s largest two brands’ traffic performance versus industry peers, it could be a stretch to get to positive traffic growth (on a sustained basis) any time soon. 

 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - Olive Garden Gap to Knapp Traffic

 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - Red Lobster Gap to Knapp Traffic

 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - dri gap to knapp

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 

 

 

 

 


Berlusconi Drives Hung Parliament: Reviewing Italian Election Results

Today’s results (which are still being tabulated) suggest a hung parliament in Italy, with Berlusconi taking the upper house and Bersani winning the lower house. Given that both houses have equal powers, the stalemate suggests that today’s results will force Italy’s President to call for an interim government and another round of voting.

 

The results show that Italians voted against the fiscal reforms under Monti. The Italian 10YR yield increased 12bps versus to 4.49% and the spread versus German bunds increased 14bps as the EUR/USD fell -0.89% to $1.3076 on the day.

 

Broadly, today’s results show that economic uncertainty breeds political uncertainty, a case we seen time and time again across the Eurozone. We think this power vacuum should put upward pressure on Italian sovereign and bank spreads, a drag on the country's already weak economic fundamentals.

------

 

While final votes are still being tabulated, the key take-aways of today’s results are:

  • Strong support for Peppe Grillo and his anti-austerity party (The Five Star Movement, M5S) and increased support for Silvio Berlusconi’s center-right People of Liberty Party (particularly in the upper house) took needed support from Pier Lugi Bersani and his center-left Democratic Party alliance to led to a mixed upper and lower house result.
  • Since Grillo’s party is not looking to form a coalition with anyone, his support is simply creating a wedge in coalition building

In the Lower House (630 seats) -

  • Bersani took majority control, gaining some 340 seats, on 29.2% of the vote, according to projections
  • Berlusconi got 28.7% and 121 seats
  • Grillo received around 111 seats on 26.1%
  • Monti took a mere 8.4%

 

In the Upper House (315 seats) -

  • Berlusconi may have "won" the Senate race with 113 seats, according to RAI forecasts by gaining the key swing regions of Sicily, Campania and Lombardy
  • Bersani – 105 seats
  • Grillo – 63 seats
  • Monti – 20 seats

 

Matthew Hedrick

Senior Analyst

 

 


FEB IL LICENSING UPDATE

IL approvals chugging along, albeit at a slowing pace

 

 

Today, the Illinois Gaming Board (“IGB”) released a list of all licensees, which included 1279 licensed establishments, implying the approval of 136 incremental establishments, a deceleration from January and December.  The February approvals compare to 188 in January and 350 grants in December.  To date, there have been no establishment licenses revoked and 91 establishments have been denied licensure.  There has been one terminal operator who had its license revoked along with 22 terminal operators and 1 manufacturer that have been denied licensure.  Currently, there are 2,596 establishments pending approval, a 4% increase from January.

 

Each location can have a maximum of 5 machines so 1,279 approved locations imply a current maximum market size of 6,395.  There were 3,394 machines online in January, up from 2,290 in December.  VGT revenue in January rose to $9.78 million from $7 million in December.  It looks like average win per day in January was around $115/day.

 

We stand by our prior estimate of a 10,000 unit market by the end of 2013.  We expect that most of the VLT sales (upwards of 75%) will come with some sort of financing, but the vast majority will be accounted for as for-sale machines.

 

Our understanding is that ASPs should be around $12k range.  We believe that distributors receive a 10-15% cut of the purchase price as their commission, with the big suppliers paying on the low end of that range and some of the smaller guys paying at the higher end of that range.  Typically, distributors take the machines on a consignment basis, meaning that suppliers cannot recognize revenues until the machines are placed in the establishments.

 

DETAILS ON PENDING APPLICATIONS:

Distributor:  3

Manufacturer:  3 (including Speilo and Konami)

Supplier:  3

Technicians:  21

Terminal handlers:  143

Terminal operators:  11

Establishments:  2,596 pending


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MAKE IT OR BREAK IT TIME FOR INDIA

Takeaway: The FY13 budget stands to create either a meaningful buying opportunity or intense selling pressure across Indian financial markets.

SUMMARY BULLETS:

 

  • India's FY14 budget is due to be released on FEB 28; this is arguably the most important fiscal policy catalyst in India since the introduction of the FY12 budget roughly two years ago.
  • If Finance Minister Palaniappan Chidambaram’s deficit-reduction plan is interpreted favorably by the market (i.e. they rely more on actual spending cuts rather than aggressive economic growth and revenue assumptions), then the recent weakness across Indian financial markets may end shortly, as some showing of fiscal sobriety would allow the RBI to resume its monetary easing activity – the #1 factor behind the recent upswings across India’s equity, currency and bond markets (as expected, the RBI cut rates on 1/29).
  • If the aforementioned measures are not deemed credible, then expect continued weakness across Indian financial markets – at least over the next few weeks. That would likely be driven by a measured reversal of international capital flows.

 

The SENSEX is down -3.8% since it’s JAN 25th cycle-peak and the INR is down -1.6% vs. the USD since its FEB 5th cycle-peak and both continue to correct in line with our expectations.

 

All eyes are on the FEB 28th introduction of the FY14 Budget where Finance Minister Palaniappan Chidambaram is expected to announce steps to reduce the budget deficit to 4.8% of GDP in the upcoming fiscal year ending in MAR ‘14 and to 3% by FY17.

 

If Chidambaram’s deficit-reduction plan is interpreted favorably by the market (i.e. they rely more on actual spending cuts rather than aggressive economic growth and revenue assumptions), then the aforementioned corrections may end shortly, as some showing of fiscal sobriety would allow the RBI to resume its monetary easing activity – the #1 factor behind the recent upswings across India’s equity, currency and bond markets (the RBI cut rates on 1/29):

 

  • SENSEX is still up +5.6% from its 11/16 cycle-trough;
  • The INR is still up +2.9% from its 11/26 cycle-trough; and
  • India’s 10Y nominal yield is still down -43bps from its 11/23 cycle-peak.

 

If the aforementioned measures are not deemed credible, then expect continued weakness across Indian financial markets – at least over the next few weeks. That would likely be driven by a measured reversal of international capital flows.

 

MAKE IT OR BREAK IT TIME FOR INDIA - 5

 

As outlined in our recent research notes on India, we’d eventually like to buy the SENSEX/INR a lot lower for a likely move to Quad #1 on our GIP chart in the 2Q13 to 3Q13 time frame (see: “PATIENCE SHOULD PAY DIVIDENDS IN INDIA” (1/8) and “INDIA & BRAZIL: UN-ACCORDING TO PLAN?” (1/29)). For now, India looks poised to record a brief visit to Quad #3 for the time being:

 

MAKE IT OR BREAK IT TIME FOR INDIA - INDIA

 

Our updated risk management levels on Indian equities are included in the chart below. Watch that TREND line carefully; a confirmed hold or breakdown will tell us all we need to know about what the FY14 budget portends for India's structural growth and inflation dynamics.

 

Stay tuned.

 

Darius Dale

Senior Analyst

 

MAKE IT OR BREAK IT TIME FOR INDIA - 3


#QUADRILL-YEN: WHO IS HARUHIKO KURODA?

Takeaway: A confirmation of Haruhiko Kuroda as the next BOJ governor is explicitly bearish for the Japanese yen over the intermediate-to-long term.

SUMMARY BULLETS:

 

  • Regarding the aforementioned question, we can’t be more explicit in stating that this is precisely the “dovish [political] puppet” we thought current BOJ Governor Masaaki Shirakawa would eventually be replaced by early in the chronicles of our ultra-bearish thesis on the Japanese yen. Under the assumption that he is the new face of BOJ leadership, Japanese monetary policy will get a lot more aggressive over the intermediate term, as Kuroda has been openly supportive of the LDP’s drive to achieve “+5% monetary math”.
  • For example, in 2002 he co-authored an op-ed piece calling for the aggressive pursuit of a +3% inflation target in Japan, as well as globally-coordinated Policies To Inflate. It should also be noted that he was formerly a career Japanese bureaucrat, entering the Ministry of Finance in 1967, eventually rising to succeed Eisuke Sakakibara as Vice Finance Minister for International Affairs (i.e. Japan’s top currency market official). It was from Sakakibara a.k.a. “Mr. Yen” himself that Kuroda learned the skills necessary to contend and ultimately record “victories” in today’s global Currency War.
  • From our interpretation of the legacy media coverage of this trade, it seems like there are a number of investors and Old Wall pundits who now think the down-yen trade has played itself out and that the balance of risks points to a sideways/stronger yen from here amid likely BOJ policy disappointments. Much to the contrary, and within the context of our structural bullish bias on the USD, we continue to think the long USD/JPY trade is still in the early innings. In fact, we continue to see the next “stop” as ¥100 per USD w/ upside risk to ¥125 per USD over the long-term TAIL. We remain the bears on the Japanese yen, with the JPY now down -17% vs. the USD from when outlined the first components of our bearish thesis back on 9/27.

 

It has been widely reported this weekend that the Abe government has selected Asian Development Bank head and former Finance Ministry official Haruhiko Kuroda as its candidate to replace Masaaki Shirakawa as the next governor of the BOJ when the latter’s term expires on MAR 19.

 

Additionally, Reuters also cited comments from Japanese academic Kikuo Iwata stating that he has been asked to be a deputy governor of the BOJ (he also noted that he would accept the nomination). There is also talks that senior BOJ official Hiroshi Nakaso will also be nominated for the other deputy governor position. 

 

It should be duly noted that any news on the candidacy front still speculation, as Economics Minster Akira Amari stated he had not yet heard from Shinzo Abe regarding these choices – at least not yet. Finance Minister Taro Aso was, however, out this weekend suggesting that Kuroda, 68, would be the “correct choice” as the next head of the Bank of Japan.

 

Under the assumption that  these are the likely new faces of BOJ leadership, Japanese monetary policy will get a lot more aggressive over the intermediate term. Each of the three candidates are said to be explicit doves and supportive of the LDP’s drive to achieve “+5% monetary math”.

 

THE MARKET AGREES

This morning, 5Y JGB yields hit another record low (0.123%) on speculation one of the BOJ’s first steps towards achieving the inflation target under the new regime would be to increase the duration of its sovereign debt purchases, as their current policy of buying debt maturing in less than three years is the functional equivalent of swapping cash for cash – it’s no wonder Shirakawa’s BOJ hasn’t been able to help Japan overcome deflation in an era of all-time highs in natural resource prices.

 

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - 1

 

Five-year breakeven inflation rates also hit another all-time high this AM as well (1.26%), as a Kuroda-led BOJ would be particularly supportive of rising inflation expectations in Japan. As recently as FEB 11th, he was out suggesting that the BOJ has “really substantial room for monetary easing” and that “the global standard for achieving inflation targets was a two-year time horizon”.

 

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - 2

 

IS THIS A DONE DEAL?

Early media speculation suggests the DPJ is expected to support Kuroda’s candidacy in the Upper House (meaning he’ll eventually secure the job officially), but we’re still skeptical in the lack of further evidence on this front. Even if the DPJ doesn’t support Kuroda and/or any of the other two perceived LDP candidates, that doesn’t necessarily mean their candidacy is void. It simply means that the LDP and NKP coalition (83 and 19 seats, respectively) will have to gain the support of smaller regional parties instead.

 

Eleven votes from Your Party – which has rhetorically aligned themselves with the LDP-NKP platform on this agenda – would put them at 113 seats, leaving them 9 seats shy of a decisive victory, but still well within reach because we think the smaller parties will be more inclined to associate themselves with the LDP’s drive to reflate the Japanese economy ahead of the JUL ’13 Upper House elections, rather than side with the DPJ, which was blown out in the DEC Lower House elections.

 

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - Japan House of Councillors

 

WHO IS HARUHIKO KURODA?

Going back to our original question: “Who is Haruhiko Kuroda?”, we can’t be more explicit in stating that this is precisely the “dovish [political] puppet” we thought current BOJ Governor Masaaki Shirakawa would eventually be replaced by early in the chronicles of our ultra-bearish thesis on the Japanese yen.

 

For example, in 2002 he co-authored an op-ed piece calling for the aggressive pursuit of a +3% inflation target in Japan, as well as globally-coordinated Policies To Inflate:

 

“The BoJ would have to adopt innovative, non-traditional anti-deflationary policies. These should include an explicit inflation target of 3 per cent to be achieved in stages - such as 1 per cent inflation within a year, and 2-3 per cent within the following two years. The BoJ clearly needs to provide more liquidity to the market and constantly increase base money through purchases of long-term government bonds and other financial instruments. A tripartite strategy for global reflation would bring major benefits to the world economy with minimum cost.”

-Haruhiko Kuroda, DEC ‘02

 

It should also be noted that he was formerly a career Japanese bureaucrat, entering the Ministry of Finance in 1967, eventually rising to succeed Eisuke Sakakibara as Vice Finance Minister for International Affairs (i.e. Japan’s top currency market official) in 1999. It was from Sakakibara a.k.a. “Mr. Yen” himself that Kuroda learned the skills necessary to contend and ultimately record “victories” in today’s global Currency War.

 

WHERE TO FROM HERE?

Make no mistake, it remains Japan’s “turn” to take center-stage in this drama, as per our relative analysis of G3 post-crisis monetary policy:

 

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - 4

 

From our interpretation of the legacy media coverage of this trade, it seems like there are a number of investors and Old Wall pundits who now think the down-yen trade has played itself out and that the balance of risks points to a sideways/stronger yen from here amid likely BOJ policy disappointments.

 

Much to the contrary, and within the context of our structural bullish bias on the USD, we continue to think the long USD/JPY trade is still in the early innings. In fact, we continue to see the next “stop” as ¥100 per USD w/ upside risk to ¥125 per USD over the long-term TAIL. We remain the bears on the Japanese yen, with the JPY now down -17% vs. the USD from when outlined the first components of our bearish thesis back on 9/27.

 

Darius Dale

Senior Analyst


Are Stocks Destroying Gold?

Looking at a three-month chart of the S&P 500 (SPY) versus the SPDR Gold Trust ETF (GLD), we can see that the US stock market has outperformed gold quite a bit with gold declining -9.2% and the S&P 500 gaining +7.54% during the time period.

 

Are Stocks Destroying Gold? - SPYGLD


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