DRI: A Rare Opportunity

Bountiful, Low-Hanging Fruit


Darden’s core concepts, Olive Garden, Red Lobster, LongHorn Steakhouse, account for approximately 90% of the company’s consolidated sales and have average unit volumes of roughly $4.1 million.  Chili’s accounts for 83% of Brinker’s sales and produce average unit volumes of $3 million. 


On a trailing-twelve-month basis, Darden’s consolidated restaurant-level operating margins are 560 bps higher than Brinker’s. While part of the gap in restaurant-level operating margins can be explained by Darden’s large real estate position, it is interesting to note that Brinker’s operating margins are, on a trailing-twelve-month basis, 100 bps higher than Darden’s.  The money Darden saves by not paying rent is being spent on a fat corporate structure.  We think that fat can be cut by an activist either by straightforward cost-cutting measures alone or by reorganization or both. 



What About Scale?


Darden management has been exalting the efficiency-related benefits of a multi-brand portfolio for years.  If that were true, the company’s operating margins would be better.  However convincing, or convinced, Darden’s executives may seem when discussing the “economies of scale” of the business model, we do not see it in the numbers. 


Cutting SG&A is the best way to achieving the 10-11% operating margins that we believe are within the company’s capabilities.  On a trailing-twelve month basis, the company’s operating margins have been running at 7.7%. 


We estimate that cutting SG&A by $239mm on an annualized basis, or 28% versus current levels, would bring margins to 10.5%.


In our recent Black Book, we discussed a sum-of-the-parts analysis that suggested a $17 premium to the current share price based on a valuation of the company's chains and real estate. Combining this with the SG&A savings of $239 mm pretax, or $1.40 per share, implies $37 per share of potential upside available if the company is reorganized and SG&A levels are rightsized. 


This implies a 75% premium to the current share price.



DRI: A Rare Opportunity - dri big 3 chilis auv


DRI: A Rare Opportunity - eat dri rest levl marg


DRI: A Rare Opportunity - eat darden opmargins



Howard Penney

Managing Director


Rory Green

Senior Analyst



Today: Expert Call with William W. Keep on Pyramid Schemes and the Multi-Level Marketing Industry

The Hedgeye Consumer Staples team, led by Rob Campagnino, will be hosting an expert call featuring William W. Keep TODAY at 1:00pm EST entitled "Pyramid Schemes and Multi-Level Marketing."



  • Date: Monday, March 25th at 1:00pm EST
  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 587456#
  • Additional reading materials: CLICK HERE



  • What is Multi-Level Marketing (MLM) and where does it come from?
  • What are the key factors that determine a pyramid scheme versus a legitimate MLM company?
  • Framing the industry's learnings from such pyramid schemes as Equinox, Burn Lounge and Fortune Hi-Tech Marketing
  • Discussion of the FTC's role in the industry
  • Contextualizing Herbalife moving forward




Keep is a professor of marketing at The College of New Jersey and currently serves as Dean of the school. His research and writings -- published in the Journal of Marketing, the Journal of Public Policy and Marketing, the Journal of Business Ethics, and The Chronicle of Higher Education, among others -- focus on long-term business relationships, business ethics, public policy and higher education. As a consultant he worked with a variety of firms and served as an expert witness in the prosecution of pyramid schemes, including Security Exchange Commission (SEC) v. International Heritage Inc., at the time the largest pyramid scheme ever prosecuted by the SEC. Keep has appeared on CNBC to discuss the topic of pyramid schemes, the MLM industry, and Herbalife and published articles on the subjects for CNBC and Seeking Alpha.


Professor Keep holds a PhD in Marketing from the Eli Broad College of Business at Michigan State University (MSU) and a B.A. from James Madison College at MSU in social science and economics.




Please email  to obtain the dial-in information for this call and a copy of the presentation, or to learn more about our research.




Rob has nearly 20 years experience in the industry and within the last 5 years on the buy side at some of the top hedge funds in the business, including Pioneerpath, Diamondback Capital, and Searock Capital. Prior, he was a senior equity analyst at Prudential Securities where he was consistently Institutional Investor ranked. Before Prudential he was at Sanford Bernstein as an equity research associate covering food, beverage, and retail. He began his career as a strategic consultant with PricewaterhouseCoopers. Rob has a MBA from Columbia and BA in Economics from Duke.



Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service.


European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .


* Systemic Risk vs. Local Risk. The most interesting callout in this week's risk monitor is the divergence between Euribor-OIS and EU bank swaps. Euribor-OIS was tighter week-over-week, moving from 12.70 bps to 12.20 bps. Meanwhile, bank swaps across Europe were meaningfully wider. This speaks to Cyprus not being a systemic risk to the banking system in spite of the media's best efforts at making it one, or at least the markets didn't see it that way. 


If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.


Matthew Hedrick

Senior Analyst


European Financials CDS Monitor – Not surprisingly, EU bank swaps widened sharply last week. French banks were among the hardest hit with BNP wider by 26 bps, Credit Agricole wider by 35 bps and Soc Gen wider by 39 bps. German, Italian and Spanish banks followed suit.


European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. banks


Sovereign CDS – Despite the turmoil, global sovereign swaps were only modestly wider last week. Portugal was the worst performer, widening by 18 bps WoW.


European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. sover 


Euribor-OIS spread – The Euribor-OIS spread tightened by 1 bps to 12 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 


European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. euribor


ECB Liquidity Recourse to the Deposit Facility – In spite of the turmoil in Cyprus, ECB overnight deposits were unchanged last week. The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  


European Banking Monitor: Cyprus Doesn’t Shake Systemic Confidence - xx. facility

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.68%

Copper and the Dollar

Takeaway: Get the US dollar right, you'll get a lot of other things right - like copper, for example.

What's good for the US dollar is bad for commodities these days. We see that correlation across many different commodities, but copper prices are showing a particularly strong correlation as you can see in the chart below. The chart shows high grade copper prices versus the the US dollar index for the past 30 days.


Copper and the Dollar - Copper vs USD



Macau put up another strong week and while ADTR failed to keep up with the torrid pace of the first two and half weeks, revenues were still very good.  ADTR grew 33% YoY this past week to HK$886 million.  Our full month projection is higher once again, to HK$29.5-30.5 million which would represent YoY growth of 22-26%.  We are hearing that high VIP hold is only partly responsible for the March strength as volumes in both Mass and VIP have been very healthy.


Market shares thus far in March are consistent with recent trends for the most part.  The slight exceptions are SJM higher and MGM lower.  We continue to like MPEL and LVS as the best Macau long ideas.





Dollar General: On the Margin

Takeaway: The key margin driver for Dollar General might not have much more room to run.

Dollar General (DG) reported earnings earlier this morning, which showed sales growth but also improving margins. But, the key margin driver for DG is slowing as you'll see from the chart below.


Consumables, items like food or other perishables that have consumers returning frequently to the stores, now account for 74% of total sales, up from 69% and about has high as they can really go. This high percentage of consumables creates more frequent visits to the stores, improves comparable sales and ultimately makes margins higher.


As such, the rate of margin improvement will slow, and that will hamper the pace of appreciation in DG's stock price, too.


Dollar General: On the Margin - Dollar General 032513


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