DRI Earnings Preview

Darden Restaurants reports 3QFY12 EPS on Friday.  We are not expecting management to reverse course on its bearish view of FY13 and FY14 and, as we outlined during a conference call with clients on 3/14, we believe the stock is in a “win-win” scenario.  Here is a copy of our recent presentation materials and the accompanying audio link, titled, “DRI: The Unthinkable Long Case”. 


While we would not object to a shakeup of the management team or the emergence of an activist investor to bring about a change in strategy, there have been some positive signs that the company is considering fresh approaches to how it is allocating capital. 


Two marginal positives in a sea of negatives over the past couple of months include:

  • During the Analyst Meeting, Dave George, the new President of Olive Garden, acknowledged the deteriorated value proposition of the concept, as well as the need to slow unit expansion and focus more narrowly on execution
  • Red Lobster is testing a new “pay at the counter” version of its concept.  Customers place their orders at a counter and a server delivers the food when it’s ready.  It’s difficult to know if this concept will prove effective in attracting customers but we take the company thinking differently about its strategy, and capital allocation, as a marginal positive.  For too long, as we detailed in our Black Book, “DRI: The Unthinkable Short Case”, in July, the company had been slow to react to decelerating trends and made poor capital allocation decisions.  With seafood commodity prices, particularly Lobster, being so volatile, a move to a higher margin concept makes sense to us at first blush.




As preannounced, sales continued to be soft at Darden’s core brands during the third fiscal quarter.  With Knapp Track comparable restaurant sales decelerating to -5.4% in February, we would anticipate that trends deteriorated intra-quarter at most, if not all, of Darden’s concepts.  The chart below shows what the sequential acceleration in the Gap-to-Knapp that is implied by Darden’s preannouncement late last month. 


DRI Earnings Preview - knapp dri gap to





Given the dividend, which it seems management is intent on preserving, and the fact that Knapp alluded to improving casual dining trends in March, we do not see significant downside to the stock from here.  We believe, that after years of underperformance, any significant deterioration in guidance is likely to prompt intervention by an activist investor.  Even at current levels, we believe the breakup value of the stock is exceeds the current share price.  See the slide deck of our recent call for more details.


DRI Earnings Preview - dri win win



Howard Penney

Managing Director


Rory Green

Senior Analyst



Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more