Greenhill, Bullish

Takeaway: In an improved M&A landscape, Greenhill (GHL) stock would perform very well.

As we expected, Greenhill’s 3rd quarter earning’s result was weak, missing estimates with a result of $0.06 per share in earnings versus consensus at $0.12 per share. With a current stock dividend yield of 3.7%, and a yield that has never gone above 5.0%, we think we are close to an attractive entry point for GHL shares.


Greenhill, Bullish - cast1


As we articulated in our recent Hedgeye M&A Blackbook, we think the M&A market could have a positive 2014 which would be above Street expectations for the following reasons:


1.) Near record amounts of cash are building up on corporate balance sheets

2.) The U.S. private equity sector has just raised new capital for the first time in 4 years that needs to be invested

3.) That an inflection point in economic activity is being made in Europe which will improve M&A activity there regionally

4.) That the ongoing secular decline in U.S. volatility will spur M&A activity into 2014 as it has done historically


In an improved M&A landscape, Greenhill (GHL) stock would perform very well.

Click here to watch video 2-minute: "GHL: Big Beneficiary of M&A Uptick."




Takeaway: Lower gas prices, it's a good thing.

Gas prices at the pump are sliding and down year-over-year and quarter-over-quarter, despite flat oil and negative policy headwinds. In isolation, this is obviously a tailwind for U.S. consumer spending. The acute risk from here is that Bernanke's dollar destruction catalyzes a reversal in energy prices.


Relief? - drake


Takeaway: Barington's proposal is not the solution. Here's our take:

We are pleased to see Barington is putting pressure on Darden’s management team to increase shareholder value.  Darden is a company with many strengths but, as we and others have demonstrated, the company is grossly underutilizing its considerable assets. The financial results of the company have, in our view, long been a leading indicator of a need for management to rethink its approach to creating shareholder value.  


Yesterday, we read Barington’s letter to the Board of Directors of Darden calling for the company to essentially create two separate companies – a mature brands company and a higher-growth brands company.  While we tend to agree with Barington on a number of aspects in their assessment of the company, we do not believe that splitting the company into two is the optimal course of action.  Furthermore, we believe the Barington plan stops short of addressing the critical issues at Darden.


Under the Barington proposal, splitting the company into two does not address the issue of current Chief Executive Officer, Clarence Otis.  On this point, we are very clear – Otis needs to resign.  While implicit in their proposal is the notion that Mr. Otis need to resign, they are not demanding it.  Therein lies their biggest problem.  We don’t believe Mr. Otis will resign, so the company will likely continue to dig in and resist the Barington proposal. 


This potential resistance by the company is imbedded in their hiring of Goldman Sachs to evaluate the Barington proposal.  In the past, the company has told us that Goldman has previously looked at different alternatives for the company’s real estate and merely suggested it “do nothing.”


Considering this, we’re very skeptical that Goldman will issue a report to Darden telling the Chairman of the Board that he needs to split up the company.  In our opinion, this hiring will simply provide management with air cover against a 3% shareholder with the hope that they will go away.


With Goldman providing analytical support, we believe the management team of Darden will continue to dismiss the Barington proposal and delay the inevitable.  We are firmly of the view that a larger player will arise as an activist to affect the changes needed at Darden.


We believe the company should take a multi-step approach to realize the inherent underlying value in Olive Garden and its other assets:

  • IMMEDIATE-TERM NEEDS: Appoint a new Chairman and CEO and realign the operational side of the business around a proven team. Bring on new board members aligned with the vision of the new company.
  • INTERMEDIATE-TERM NEEDS: Identify potential cuts from the company’s cost structure and restructure the brand portfolio around a streamlined theme; potentially unlock the value embedded in its many owned restaurant properties.
  • LONG-TERM OPPORTUNITY: Aggressively franchise international markets; reshape the company’s ownership structure of the remaining restaurant base and develop key brands that can participate in the growth of the fast casual segment.




  • As we have said many times before, the company is too big and too complex to perform.
  • Darden can deliver significantly stronger returns for shareholders.
  • If possible, the Company should unlock its significant real estate value.
  • Darden has a bloated cost structure, evident by their highly inflated G&A.


We touch on all of these points in our Black Book, “Dismantling Darden.”  In reality, these points are now known knowns.  Having read the Barington letter, we are of the view that that their proposal does not go far enough. 




  • The CEO should resign.
  • We don’t believe separating the Specialty Restaurant Group solves the problem inherent in the company today.
  • Red Lobster should be sold or the units re-franchised to an asset-lite model.
  • We believe that Yard House should be brought public.
  • Create NewCo with Capital Grill and LongHorn and bring that company public.
  • We think the Company should be whittled down to its crown jewel – Olive Garden.





The issue with Darden, as Barington has acknowledged, is that the company is too large and too complex.  To be clear, we believe the Specialty Restaurant Group is a microcosm of what makes Darden so dysfunctional.


First, it is simply a conglomeration of different brands that appeal to different cohorts of consumers.  Attempting to execute on a growth plan, when operating under the same infrastructure is extremely difficult.  Each brand needs its own management team in order to effectively manage the brand.  Suffice to say, breaking up Darden into a mature brands company and a higher-growth brands company does not eliminate this problem.


Second, comparable restaurant sales trends within the Specialty Restaurant Group have been subpar for a group of “growth” companies.  Illustrated below, the two-year comparable sales trend has essentially nosedived since FY12.  We have no reason to believe this trend will meaningfully reverse in the near future.


Third, given the company’s proven lack of discipline on investing its capital wisely, we suspect that the company has shown the same lack of discipline when growing the Specialty Restaurant Group.






When something is repeated with enough conviction, and repeated often enough, people will usually come to believe it.  The truth is, the Specialty Restaurant Group is just not that special.  As we have previously said, it does not have the potential for real growth and the concepts aren’t that great – each has its own inherent problems:



Bahama Breeze

  • Not strategic
  • Box too big
  • Too few potential units


Eddie V’s

  • High-end seafood centric menu with limited appeal
  • Limited opportunities
  • Difficult to execute on a large scale
  • Sale or IPO candidate


Seasons 52

  • Its potential has been squandered under the Darden portfolio
  • Box too big
  • Too few potential units as it presently stands
  • Food has been “dumbed” down
  • The brand could be re-configured into a fast casual brand or a much smaller box casual dining brand


Yard House

  • Not strategic
  • Box too big
  • Too few potential units
  • IPO candidate


As we said before, we also believe that LongHorn Steakhouse and The Capital Grille should be a completely separate company.  In our opinion, the company could trade at a premium to the group. These could be kept as part of NewCo for a period of time, before it is spun off as its own company.




As it stands, the company’s problems stem from the implementation of a long-term strategy, in which the current management team failed to recognize the beginning of a secular downturn in the industry back in 2008.  The Darden executive leadership team is too far removed from the restaurant operations, which is one of the reasons they are most likely incapable of building Darden’s brands.


Despite secular casual dining dynamics, the company continues to stubbornly pursue a “growth agenda,” which includes opening units with a blatant disregard for return on incremental capital in addition to dilutive acquisitions.  As a consequence, the company has essentially starved its crown jewel, Olive Garden, of the capital necessary to maintain its competitive position.


We cannot emphasize enough the need for Darden to appoint a new Chairman and CEO and realign the company around a proven operating team.  The company should also seek to bring on new board members aligned with the vision of the new company.





We believe Darden should be whittled down to the crown jewel: Olive Garden.  The successful attainment of this status, and a properly motivated team of operators would undoubtedly drive significant shareholder value. 


The overarching objective is to restore the Olive Garden brand to its rightful position as the most dynamic concept in the casual dining segment of the restaurant industry. The successful attainment of this status would undoubtedly drive shareholder value.  Olive Garden represents 44% of the company, nearing $4 billion in annual sales, and has the potential to exceed $5 billion with strong profitability.


Under the leadership (or lack thereof) of Clarence Otis, Olive Garden has lost its way. It has moved away from the genuine Italian dining vision, and has lacked any innovation to stay ahead of or even keep up with changing consumer conditions in the marketplace. The result: Olive Garden has experienced comparable-restaurant guest count declines for 51 of the past 69 months.


Our plan of action below offers a compelling solution that would help Darden, and specifically 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 strategy:


  • 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


Let’s be clear: People are not suddenly uninterested in eating Italian food. While there is a definite headwind in the casual dining restaurant industry, Italian food is universally popular. It’s just Olive Garden’s Italian food that people don’t want. Market research evidence indicates that, unlike the Bar & Grill and Steak segments, the Italian category is still underdeveloped.


The most important question is how does one peel off Olive Garden in the most lucrative way for shareholders?


In our opinion, this can be accomplished by fostering an environment that enables building a great company for the future.  Once this environment is established, management should look to acquire or develop a concept to be the pioneer in an undeveloped, yet very attractive, segment of the fast casual restaurant category – Italian. 


The most successful restaurant companies have strong beliefs that are centered on two things: food and people.  Over the long-term, success is driven by constantly leading and inspiring people in ways that allow for continuous brand and food innovation. Darden Restaurants has rested on its laurels over the last eight years, while neglecting the critical elements that are essential parts of the recipe for a successful restaurant company.


As we have worked through the process of dismantling Darden, in the end we would not want to operate Red Lobster.  The main problem is the lack of a brand strategy since the 1990’s. In today’s environment, the problem with featuring a seafood-centric menu also has its challenges.  At this point, it’s not worth trying to grow the brand.  A key priority of the ‘dismantling’ plan is how to best dispose of this brand or refranchise all the stores.


In the coming weeks, we will be offering a more detailed look at Olive Garden, including what went wrong and possible solutions that would improve profitability and restore the luster to the brand. 




We are pleased Barington is pushing management to make significant changes at Darden.  However, we don’t believe the current management team will make the necessary changes.  The main challenge here is how to best rebuild Olive Garden with a new management team, while dismantling the other operating companies.




Howard Penney

Managing Director


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Takeaway: Earnings miss, but strong revenue growth, traffic growth, and same-store sales acceleration push CMG higher.

We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry.  Revenues and same-store sales beat by 80 bps and 150 bps, respectively, which helps allay any concerns over the earnings miss.  All told, the company reported a fairly strong 3Q in the midst of an unfavorable environment.  While rising food costs are a point of contention, we believe management will be able to appropriately offset this headwind in the coming quarters with minimal price increases. 


Chipotle, is one of the best managed restaurant companies in the space and we are confident that they will be able to mitigate any oncoming margin pressure.  Last quarter, we wrote that CMG was well-positioned for the balance of the year and, after reviewing 3Q13 results, we have little reason to believe this will not be the case.  For now, we expect 4Q to be another strong quarter.



What We Liked

  • Revenues: $826.9m, beat consensus estimates by 80 bps, +18% y/y
  • Same-store sales: +6.2%, beat consensus estimates by 150 bps, +70 bps sequentially
  • Traffic was positive in what was a forgettable quarter for the restaurant industry
  • CMG transactions accelerated sequentially during the year from 3% in 1Q13 to 4.5% 2Q13 to 6.2% in 3Q13 and positive trends will continue in 4Q
  • $103m left on their share buyback program
  • Targeting 180-195 new restaurant openings in 2014
  • Opening sales volumes are very strong – $1.6-1.7m
  • Plan to take 3-5% price in 2014, to offset any food inflation and the cost of removing GMOs from their menu; the timing of the price increase is unknown, although management hinted that it would be mid-2014
  • They continue to have a strong operational focus, as throughput increased by 5 transactions during the peak day hour in the quarter
  • It appears their unique marketing efforts, including the “Skillfully Made” campaign, are resonating with consumers
  • Sofritas have been impressive and should bring in incremental customers – they account for over 4% of sales in the restaurants that carry it
  • They continue to roll out the catering program, which has notable potential
  • They are not rushing their international development and will not meaningfully accelerate growth until they have properly “built the brand”
  • Likewise, they are not rushing the development of their Shop House brand, where early results have been encouraging


What We Didn’t Like

  • EPS of $2.66, missed consensus by 433 bps, +17.2% y/y
  • Food costs were 33.6%, +100 bps y/y
  • Restaurant level operating margins were 26.8%, -60 bps y/y
  • Operating margins were 16.6%, -20 bps y/y
  • Same-store sales decelerated -130 bps sequentially on a two-year basis
  • Guided to low single-digit same-store sales in 2014 – although this excludes any menu price increases
  • Guided to food costs in the 33.5-34% range for the next several quarters, excluding the cost of removing GMOs and any potential price increase  




Howard Penney

Managing Director