DRI: RESTRUCTURING CHARGE LOOMING?

Over the past year, DRI has underperformed the S&P 500 and the XLY by 26.9% and 39.3%, respectively.  These numbers make DRI the second worst performing casual dining company, only behind BJRI, during this period.

 

Since the end of FY12, DRI has lowered its annual guidance 3 times.  A consistent lowering of guidance indicates that management does not have a feasible plan to fix the company and, given the current industry conditions, things may be getting worse before they get any better.

 

Below we run through three signs that suggest management is struggling to fix the company and lead us to believe that they will lower guidance moving forward and could, potentially, announce a restructuring charge:

  1. Shrimp prices are up +56% YoY
  2. The company has supply chain issues
  3. July and August sales trends look to be well below industry trends

 

Shrimp Prices – Urner Barry’s White Shrimp Index has shrimp priced at around $6 a pound, up +56% YoY and approaching an all-time high.  The main culprit:  the emergence of a disease that has severely reduced shrimp output in China, Thailand and Vietnam.

 

 

Supply Chain Issues – In late June and early July, the FDA linked the outbreak of a rare parasite found in Iowa and Nebraska to a salad mix produced by Taylor Farms de Mexico.  This salad mix was served at an undetermined number of Olive Garden and Red Lobster restaurants in these two states. 

 

Since that time, nearly 500 people have been sickened in 16 states, while at least 30 more have been hospitalized.  While DRI has not been linked to all the foodborne illness incidents, its initial association with the outbreak was not good news for company.  We can only wonder whether all of the DRI cost cutting initiatives, particularly in its supply chain, led to this unfortunate incident.

 

 

Sales Trends – DRI’s discounting strategy began to move the needle on traffic in 4Q13, but it came at the expense of margins.  We believe there is a potentially disastrous situation brewing in FY1Q14, whereby DRI’s discounting efforts are not having the desired impact on traffic, causing a more severe blow to margins than expected.  This scenario, combined with significantly higher food inflation in FY14, leads us to believe DRI could be looking at significantly lower earnings in FY14.

 

 

Restructuring Charge


As we have said many times before, DRI is being mismanaged, plain and simple.  DRI’s 4Q13 earnings call underscored our argument that the company needs a shakeup in the C-Suite.  When approximately $1 billion in annual operating cash is not being put to productive use and a company’s leadership team consistently disappoints, this suggests that they do not have the ability to turn the company around. 

 

That said, we believe DRI’s performance over the past five years has been consistent with that of a mismanaged business and one that will need a massive undertaking to fix.  In the end, this may include rationalizing the assets of the business.

 

Hedgeye’s Take – The sum of the parts is greater than the whole, at Darden, and we believe there is a striking opportunity for an activist to enter the fray, unlock value and, ultimately, benefit shareholders.

 

 

DRI: RESTRUCTURING CHARGE LOOMING? - DRI COGS

 

DRI: RESTRUCTURING CHARGE LOOMING? - RL SRS

 

DRI: RESTRUCTURING CHARGE LOOMING? - OG SRS

 

DRI: RESTRUCTURING CHARGE LOOMING? - LH SRS

 

 

 

Howard Penney

Managing Director

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

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