DRI: A Generational Opportunity

Takeaway: We continue to believe there is significant upside in DRI. The main question is: Who will unlock the potential?

We contend that buying DRI today represents a generational opportunity in the Restaurant space, as the stock is currently trading at a significant discount to its underlying asset value.  In our view, there remains the potential for tremendous upside if the core company can improve its operational execution.


We understand that DRI is different from the companies below, but the point we are trying to make is that they have all been in similar situations, and have once felt the pressure, that DRI is feeling today.  We believe part of the upside in DRI is significant, but unquantifiable and could be realized if management is ousted (or they adopt our operating beliefs), and the company returns to a more streamlined operating structure.


In our opinion, Darden needs a forward-thinking, seasoned restaurant operator, with public company experience, to deliver an effective turnaround plan that is focuses on restoring Olive Garden profitability.  In this regard, the current Chairman and CEO, Clarence Otis, has proven his incompetence.  His lack of restaurant operating experience is a major reason the current management team has been decidedly unsuccessful.


The plan of action for DRI should be comprehensive, clear, and must offer a compelling solution that would help Darden, and specifically the Olive Garden, regain its stature as one of the premier casual dining chains in the business.


The most important pillar for the new Darden, is the formation of a closely aligned and well-functioning team of qualified, talented, experienced, and motivated personnel, that would come together to execute on the following business philosophy:

  • Superior financial results come from inspired, principled leadership
  • A clear, focused vision
  • A consumer-driven culture
  • Innovation
  • Measurable operational excellence
  • Distinctive brand consistency
  • Appropriate cost controls

Darden’s current business plan has done nothing but destroy shareholder value over the past five years.  Our recent Black Book, “Dismantling Darden”, describes, in detail, why DRI is having such a difficult time. 


The company finds itself in an eerily similar position as MCD, SBUX, and EAT, not too long ago, when these companies tried appealing to the masses and began growing units too fast.  Not surprisingly, the road to recovery for each company was essentially the same, barring some obvious nuances.


McDonald’s (2002-2007): MCD formulated the “Plan to Win” in 2002, which later became a template for success at Brinker.

  • MCD cut capital spending from $2.0 billion in FY02 to $1.3 billion in FY03
  • EBITDA bottomed at $3.2 billion in 2002 and increased 117% over the next five years
  • The stock bottomed in March 2003 at $12 and rose to $57 by the end of 2007

DRI: A Generational Opportunity - MCD CAPPER CAPPYcapex

DRI: A Generational Opportunity - EBITDA MCD



Starbucks (2007-2012): With Schultz back at the helm, SBUX focused on attacking the middle of the P&L and improving the guest experience.

  • SBUX cut capital spending from $985 million in FY08 to $446 million in FY09
  • EBITDA bottomed at $1.3 billion in 2008 and increased 88% over the next four years
  • By 2QFY09 (June) the fundamentals had improved; the stock was traded at $14 and rose to $78 five years later

DRI: A Generational Opportunity - sbux capex

DRI: A Generational Opportunity - sbux ebitda



Brinker (2008-2013): Facing an industry in the midst of a secular decline, senior management formulated a “Plan to Win”, which entailed attacking the middle of the P&L and driving traffic.

  • EAT cut capital spending from $431 million in FY07 to $273 million in FY08; the company further reduced capital spending to $88 million in FY09
  • EBITDA bottomed at $248 million in 2009 and increased 64% over the next four years
  • By 2QFY09 (January) the fundamentals had improved; the stock traded at $10 and rose to $40 five years later

DRI: A Generational Opportunity - eat capex

DRI: A Generational Opportunity - eat abitda



We don’t know exactly where DRI will shake out in the process, but we do know the company finds itself in a hole that MCD, SBUX, and EAT all managed to climb their way out of.




Howard Penney

Managing Director


Are You on Twitter?

“The most dangerous leadership myth is that leaders are born - that there is a genetic factor to leadership.  That’s nonsense; in fact, the opposite is true.  Leaders are made rather than born.”

-Warren Bennis


We’ve started our work for our October 31st IPO Blackbook on Twitter and digging into a company that was founded in 2006 and already has 215 million monthly users. Talking about going viral in a hurry!


Similar to Facebook, Twitter has that little problem of how to make money.   That attribute aside, the companies are very different, even if much of the conventional media puts them in the same category.   Facebook is a true social network and, as such, is largely closed and limited in terms of how large a network it can become.  On the other hand, Twitter is open, transparent, real-time and has scale.


Twitter is actually a true network in that it creates the network effect.  As an example, when President Obama announce his victory in the 2012 election on Twitter, that Tweet was re-tweeted more than 25 million times.  The most I’ve ever had a tweet re-tweeted was a couple of hundred times, but even there you get the point.  Twitter amplifies your communication.


Analyzing Twitter has also made me consider the importance of leadership in corporate America.  This weekend The New York Times Magazine had an article written by Nick Bilton that was titled, “All Is Fair in Love and Twitter.”  It is one version of the power and leadership struggles that have occurred within Twitter.


Twitter is also a little bit about the American dream.  Take this excerpt from the article for example:


“In 2005, Jack Dorsey was a 29-year-old New York University dropout who sometimes wore a T-shirt with his phone number on the front and a nose ring. After a three-month stint writing code for an Alcatraz boat-tour outfit, he was living in a tiny San Francisco apartment. He had recently been turned down for a job at Camper, the shoe store.”


Dorsey and his co-founders have been largely pushed out of Twitter, though many of them will obviously profit handsomely on the IPO.  Time will tell whether current CEO Dick Costolo is the right man to monetize the Twitter network, but his experience at Andersen Consulting, founding and running Feed Burner (among other start-ups), and working at Google have allowed him to acquire learned leadership assets, to Bennis’ point, that will be critical for Twitter’s future.


Now, from Silicon Valley back to the global macro grind . . .


Front and center this morning is once again the U.S. debt ceiling.  Thankfully, Bloomberg is no longer alluding to a Nazi Germany like default this morning and the reality is, as we’ve been predicting, that a deal gets done is becoming increasingly accepted.  If the deal that is purportedly on the table gets done, then the government will get funded through January 15th and the debt ceiling will get pushed to early February.


Setting aside an actual default, which was of course always highly unlikely, a short term deal is actually one of the worse scenarios.  As we show in the Chart of the Day today, economic confidence, according to the Gallup Daily tracking poll has fallen off a cliff in the last month due to the government shutdown and looming debt ceiling.  Delaying an outcome by three or four months is unlikely to be much of a catalyst to improve confidence in the short run.


We are certainly seeing these trends reflected in the real economy.  One example is the casual dining sector where weakness has been pervasive.  While certainly there are some sector specific trends at play, with the majority of the stocks missing estimates and comparable same-store-sales declining -1.9% in September according to Black Box, the decline in consumer confidence is having its impact.


All is not bad for the consumer, though, and one positive to highlight is the price of gasoline.  Even as oil remains stubbornly above the $100 bound for WTI and $110 for Brent, the price of gasoline in the U.S. is actually down. According to the Energy Information Administration, a government agency that is still open, the price of gas in the U.S. is $3.37 per gallon, which is down $0.48 from a year ago and down $0.06 from last week.  Maybe consumers are spending more time on Twitter and less time driving?


Speaking of Twitter, for those of you that answered no to the question in the title, one great reason to join Twitter is the intellectual exchange that comes from meeting new people in your expanded network.  One example of a person that I’ve met on Twitter is a gentleman named Doug Kass, who is a financial blogger for the and works out of his basement in Florida.


Even if not always correct, Kass certainly makes us think.  One example was that last night he went old school on us and sent an email indicating that based on his analysis over the long run of twenty years, the U.S. dollar has no identifiable correlation to U.S. equities.   While an interesting point, we would certainly caution any of you to invest on 20-year historical correlations.  But if you want to, we also have a bridge in Brooklyn for sale . . .


The fact is correlations influence our intermediate term view of markets.  Correlations aren’t perpetual, and correlation strength builds and decays.  At times and price levels they matter and at others they do not.  We get that.  But over the last three years the correlation between the U.S. dollar and SP500 has been 0.60.  But as Maynard Keynes said, when the facts change, we will.


Our immediate-term Risk Ranges are now:


UST 10yr yield 2.66-2.73%


VIX 15.21-17.63

USD 80.11-80.67

Brent 110.01-112.05

Gold 1


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Are You on Twitter? - Gallup Confidence


Are You on Twitter? - zz. vp 10 15

INVITE: Pipeline Maintenance Expert Call (TODAY 11am)

Continuing our work on Kinder Morgan (KMI, KMP, KMR, EPB), other midstream MLPs, and the maintenance CapEx debate, we will host an Expert Call with Richard Kuprewicz TODAY at 11am EST. 



Toll Free Number:

Direct Dial Number:

Conference Code: 419527# 


This call will focus on long-haul oil and natural gas pipeline maintenance: 

  • How does pipeline age affect pipeline maintenance?
  • How does pipeline location affect pipeline maintenance?
  • What demands the most attention and $$$ – main lines or “the moving parts”?
  • What are the most common issues?  Repairs?  Preventative maintenance and spending?
  • What is mandated / regulated in terms of maintenance spending?
  • What is mandated / regulated in terms of pipeline inspection and testing?
  • Do pipelines spend too much (gold-plating)?  Do pipelines spend too little?  How can we know?
  • Are there coming significant changes to pipeline safety / inspection regulation?
  • How do changes in owner / operatorship (M&A) affect pipeline maintenance?  A discussion of different approaches to maintaining the same systems.

Richard Kuprewicz, President of Accufacts Inc., is a leading expert on pipeline safety and maintenance issues.  He specializes in gas and liquid pipeline investigation, auditing, risk management, siting, construction, design, operation, maintenance, training, SCADA, leak detection, management review, emergency response, and regulatory development and compliance.


He consults frequently with various local, state and federal agencies, NGOs, the public, and pipeline industry members on pipeline regulation, operation and design, with particular emphasis on operation in unusually sensitive areas of high population density or environmental sensitivity.


An engineer by training, Mr. Kuprewicz has more than 40 years of experience in the oil and gas sector.  He spent the majority of his career at Arco Products and Arco Transportation, serving as manager of, and senior technical advisor on, its oil and natural gas pipelines.  He founded Accufacts – a pipeline regulatory and safety advisory firm – in 1999.


If you have any questions for Mr. Kuprewicz, send them to me at .


Kevin Kaiser

Senior Analyst

The Biggest Loser

This note was originally published at 8am on October 01, 2013 for Hedgeye subscribers.

“Get comfortable with being uncomfortable.”

-Jillian Michaels


That’s a varsity quote from one of the original trainers on NBC’s “The Biggest Loser.” To a degree, Jillian Michaels typifies the attitude of my generation of entrepreneurs in America. She’s a 39 year old self-made business woman. She didn’t get anything handed to her in life. She bartended her way through college, sucked it up, and lived the American dream.


What is the American dream? Is it a bunch of big political and media losers getting paid to perpetuate fear and crisis on cable TV? Or is it the polar opposite of that? Bernanke, Boehner, and Obama can’t shut us down. No, no, no ladies and gentlemen. Today we are going to do what we do at the top of every risk management morning – we are going to grind.


Grinding in the arena of business life has been celebrated by this country for generations. In 1925, President Calvin Coolidge reminded the American Society of Newspaper Editors that “the chief business of the American people is business” (The History of Money, pg 169). So that’s the headline coming out of this 2.0 Financial Media upstart from Stamford, CT this morning. Rise Above that.


Back to the Global Macro Grind


What’s fascinating about watching both the US stock market futures and the bond market this morning is that neither of them seem to care whatsoever about Old Media’s politicized fear-mongering. Mr. Market is shutting the media’s message down.


That shouldn’t surprise you. As newspaper editors and television producers look backward, markets look forward. Up next is the US Employment Report for the month of September.


September (and the 3rd quarter in general) was one of the best quarters for US growth expectations in half a decade:

  1. US Growth Stocks hit all-time highs (for SEP Industrials (XLI) +5.4% and Consumer Discretionary (XLY) +5.1%)
  2. US (slow growth) Bonds and Utility stocks hit their YTD lows (for SEP Utilities (XLU) only +0.18%)
  3. US Equity Volatility (VIX) hit YTD lows as well

Then, mid-September, along came Bernanke, Boehner, and Obama …. and:

  1. US Growth Stocks started making a series of lower highs (down for 7 of the last 8 days)
  2. US (slow growth) Bonds and Utilities outperformed everything growth
  3. US Equity Volatility (VIX) ripped a +26% move to the upside in less than 2 weeks

Congrats to the Fed, Democrat, and Republican parties. It’s a tie – you all get a Hedgeye sticker for America’s biggest losers!


Looking forward to the US employment report on Friday:

  1. US Growth Stocks may very well put in yet another higher-low (SP500 = 1660 TREND support)
  2. US Treasuries appear to be making another lower-high (10yr Yield = 2.55% TREND support)
  3. And front-month fear (VIX) is making yet another lower-YTD-high as well (VIX = 18.98 TREND resistance)

What say you Mr. Market about all of that?


I say it’s government versus gravity!


That would be economic gravity of course. As in the stuff that Bernanke has been trying to bend. And while bending gravity appears to be quite innovative to the Central-Market-Planner-in-Chief-of-anti-dog-eat-dog USA, that doesn’t mean it’s going to work.


So play this out – the US jobs report on Friday has a binary outcome:

  1. It’s a moon-shot to the upside and bond yields rip (again) to the upside
  2. It’s in line to a “miss” and Bernanke and his old-boys from anti-gravity-smoothing headquarters say “we nailed it”

Which of the two will it be?


I’m proud to say that I have absolutely no idea. That’s why the Hedgeye Asset Allocation Model has a 50% Cash position and in our #RealTimeAlerts I only have 5 LONGS, and 4 SHORTS. Getting out of the way of this political gong show was a risk managed decision.


I’m very comfortable grinding out another business building day. I’m uncomfortable with risking what’s been a great year for us on a government report that could go either way.


UST 10yr Yield 2.59-2.68%

SPX 1675-1702

Nikkei 14303-14612

VIX 14.64-16.99

USD 80.02-80.77

Brent 107.08-108.98


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Biggest Loser - Chart of the Day


The Biggest Loser - Virtual Portfolio

What's New Today in Retail (10/15)

Takeaway: Nightmare scenario for WMT. AAPL lands former BRBY/FNP exec for RJ's job. Big initiative for AMZN. H&M sales slow -- good global barometer.



Hedgeye RH Black Book: Tomorrow, Wednesday Oct 16th at 11am.




  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 779954#
  • Materials: CLICK HERE



Please email  for further details.


WWW: Analyst Meeting today in NYC. Webcast:




ICSC - Chain Store Sales Index


Takeaway: Chain store sales remain anemic according to this morning's ICSC reading -- with the second lowest growth rate for the year to date.


What's New Today in Retail (10/15) - chart1 10 15

What's New Today in Retail (10/15) - chart2 10 15




WMT - Walmart shelves in Springhill, Mansfield, cleared in EBT glitch



  • "Shelves in Walmart stores in Springhill and Mansfield, LA were reportedly cleared Saturday night, when the stores allowed purchases on EBT cards even though they were not showing limits."
  • "[Police Chief Will] Lynd explained the cards weren't showing limits and they called corporate Walmart, whose spokesman  said to let the people use the cards anyway."
  • "Lynd says at 9 p.m., when the cards came back online and it was announced over the loud speaker, people just left their carts full of food in the aisles and left."
  • "It all happened at the end of a day in which the EBT system went down in several states, including Louisiana. Xerox, a vendor for the EBT system, experienced a power outage while conducting a routine backup test in one of the company's locations. While the system was back up Saturday night, it appears that it was not functioning entirely properly in some areas."
  • Asked whether Walmart would be taking the loss on any food purchased on the cards that did not show limits, or on the perishable food left behind in carts, [Wal-Mart spokesman] Whaling would only say that 'we monitored transactions during the outage.'"


Takeaway: This is, without a doubt, the strangest in-store blow-up I've ever seen. Ever is a long time. Not sure whose reputation it's worse for -- WMT or Xerox. Probably Xerox (WMT is used to bad press).


What's New Today in Retail (10/15) - chart3 10 15


BRBY, AAPL - Apple Hires Burberry CEO as Retail Chief



  • "[AAPL] tapped Angela Ahrendts, currently chief executive of British luxury retailer…[BRBY] head up its retail efforts…"
  • "Apple said Ms. Ahrendts, 53 years old, would join Apple next year in the newly created position of senior vice president of retail and online stores. She will become a member of the executive team and report directly to Apple Chief Executive Tim Cook."
  • The appointment fills a big gap in Apple's retail operations, stemming from the 2011 departure of Ron Johnson, who vacated the role of senior vice president for retail to join...[JCP]. His replacement, John Browett, left the company last year."


Takeaway: It's amazing that Ahrendts went from such humble beginnings at the former Liz Claiborne (FNP), then landed a dream job at Burberry, only to end up in the best job in all of retail.


WWW - Keds Debuts Retail Shop



  • "Keds…recently opened its first freestanding store, a 150-sq.-ft. shop at a mall in Natick, Mass."
  • "The idea was to launch in a kiosk-designated area, known for high foot traffic. The spot features signage to tell the brand story, including Taylor Swift marketing materials, and showcases 45 different SKUs with a focus on Keds’ fashion push. Some featured styles are from the Taylor Swift and Kate Spade collaborations."


Takeaway: Our view remains that Keds will go from being a $100mm brand today, to $400mm over 4-years. Most growth will be outside the US. WWW will hit on this today at its NYC analyst meeting (though its growth goals will be below ours).


What's New Today in Retail (10/15) - chart6 10 15


AMZN - Soap Opera: Amazon Moves In With P&G



  • "Each day, P&G loads products onto pallets and passes them over to Amazon inside a small, fenced-off area. Amazon employees then package, label and ship the items directly to the people who ordered them."
  • "The e-commerce giant is quietly setting up shop inside the warehouses of a number of important suppliers as it works to open up the next big frontier for Internet sales: everyday products like toilet paper, diapers and shampoo."
  • "Amazon instead is going out to its suppliers with a program it calls Vendor Flex. By piggybacking on their warehouses and distribution networks, Amazon is able to reduce its own costs of moving and storing goods, better compete on price with Wal-Mart and club stores like Costco Wholesale Corp., and cut the time it takes to get items to doorsteps."
  • "Household staples have traditionally been considered too bulky or cheap to justify the cost of shipping. Americans currently buy just 2% of such goods online, retail analysts estimate. Yet even that sliver of business was worth $16 billion in 2012, according to Nielsen Holdings NV, and the research firm believes online sales will grow by 25% a year to $32 billion in 2015."


Takeaway: This is a very big idea. So good for AMZN, and so bad for your local supermarket.


RH - Restoration Hardware launches Holiday sourcebook…and yes you can have them delivered


What's New Today in Retail (10/15) - chart4 10 15


Takeaway: We're hosting a call tomorrow to discuss our thesis on RH, and how we get to $8+ in earnings power. We'll also address key issues we explored in our consumer survey, one of which is consumers' attitude towards the Sourcebook. We were surprised by what we uncovered. Dial in tomorrow at 11am EDT.


HMB - H&M Sales Fall 2% in September



  • "Hennes & Mauritz AB said same-store sales fell 2 percent in September after rising 4 percent in August.
  • Sales in local currencies climbed 7 percent, a decrease over August, when they gained 14 percent, the Swedish high-street retailer said."
  • "In September 2012, H&M had reported a 6 percent rise in same-store sales and a 15 percent increase in local currencies."
  • "The store count stood at 3,006 doors on Sept. 30, compared with 2,669 stores at the same time last year."


Takeaway: H&M is the most globally-diversified apparel retailer. Germany accounts for about 20% of sales, the US, UK and France each account for about 8%, and then a dozen other countries account for 5% or less.  It's a great barometer for the global retail economy.


ADS - Lacoste to Outfit Team France in Sochi


  • "The Lacoste crocodile logo will make his way onto Team France’s outfits at the Olympic and Paralympic Games in Sochi, Russia, in February. The Lacoste brand replaces Adidas as the official outfitter for the French Olympic team."


What's New Today in Retail (10/15) - chart5 10 15


Takeaway: It's odd that Adidas lost France to Lacoste given the sheer differential in the size of each brand's endorsement wallet. There's no way Lacoste could outbid Adibok, which tells us that Adi simply walked away.


Moncler - Moncler Sets IPO by End of Year



  • "After months of speculation and a shelved initial public offering in 2011, Moncler SpA on Monday filed documents to list on the Italian Stock Exchange."
  • "The IPO is expected to take place by the end of the year and sources say the company will float between 25 and 30 percent of its total shares. Industry sources said Moncler’s IPO could value the company at around 2 billion euros, or $2.7 billion at current exchange."


RMS - Hermès Opens New Milan Flagship



  • "After 26 years on Via Sant’Andrea, Hermès has changed its Milanese address, moving its flagship to Via Montenapoleone."
  • "On Monday, the French luxury company unveiled its new boutique covering 6,459 square feet, almost double the space of the former unit."


WMT - Supreme Court to Hear Wal-Mart ERISA Case



  • The Supreme Court is set to hear oral arguments Tuesday in a case involving a former Wal-Mart Stores Inc. employee whose long-term disability benefits claim was denied by the retailer’s insurance provider.
  • " The Supreme Court granted writ of certiorari in April to a petition filed by Julie Heimeshoff, a former senior public relations manager for the retailer, against Hartford Life & Accident Insurance Co. and Wal-Mart."
  • "Heimeshoff, who worked for Wal-Mart from 1985 to 2005, applied for long-term disability benefits under Wal-Mart’s ERISA plan administered by Hartford in August 2005 after she fell ill with what she said was fibromyalgia, chronic pain and other conditions. But Hartford denied her claim that December and again on a subsequent appeal in 2007, arguing its own rheumatologist consultant determined that Heimeshoff was 'able to perform the activities of her sedentary occupation,' according to court documents."


Takeaway: Another example of how WMT can't win. Either it ponies up and pays a claim that may or may not be valid -- setting a dangerous financial precedent -- or it goes to court and gets bad press over not paying a disabled worker (even if not disabled, that will be the perception).


DECK - Deckers Wins Design Lawsuit



  • "Deckers Outdoor Corp. has emerged as the winner of a lawsuit filed by Intermedium Shoes B.V."
  • "The suit originated in The Hague District Court and referenced a design patent for the Ugg Australia Bailey Button boot."
  • "The court decision ordered Intermedium to 'cease and desist the knock-off product.' And in addition, Intermedium will send a letter to all customers who purchased the product to explain that the infringement was a design right belonging to Deckers."


What's New Today in Retail (10/15) - chart12 10 15


Takeaway: Deckers has not had many challenges to it's Intellectual Property. This one is a particularly big win.


CHS - Chico’s FAS enters Canada with White House Black Market



  • "Chico's FAS is expanding outside of the United States, opening a White House Black Market store at Yorkdale Shopping Centre, Toronto on Oct. 24. The women's apparel retailer will open its second Canadian location at Square One, Mississauga on Oct. 29, followed by Upper Canada Mall, Newmarket on November 12."




Recasting the Retail Store in Today's Omnichannel World



  • "Despite a host of new shopping options, talk of the demise of brick and mortar is premature. Retail stores remain at the heart of the customer relationship and play a main role in fulfilling multi-channel demand."
  • "...our online study of 3,200 U.S. and UK consumers shows that stores remain at the heart of retailers' relationships with consumers, even in today's "omnichannel" world where online and mobile sales appear to rule.1 The evidence is clear: Consumers value the retail store experience on multiple levels and continue to make the vast majority of their purchases in stores. And, importantly, the value of stores extends well beyond brick-and-mortar to help increase volume and revenue across all channels."


What's New Today in Retail (10/15) - chart7 10 15

What's New Today in Retail (10/15) - chart8 10 15

What's New Today in Retail (10/15) - chart9 10 15

What's New Today in Retail (10/15) - chart10 10 15

What's New Today in Retail (10/15) - chart11 10 15

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