Editor's note: Hedgeye Restaurants Sector Head Howard Penney continues to bang the "Dismantle Darden Drum." Here is a complimentary excerpt from his latest research note and a link to video interview.
We believe we’ve been very clear on how this will end for Darden (DRI), we just don’t know the timing. As analysts, trying to advocate for significant change, the biggest issue we need to deal with in the immediate-term is business trends. We can summarize the current trends in two words – not well!
The being said, the FY2Q114 earnings call will be the most important call of CEO Clarence Otis’ career. His ability, or inability, to handle the current pressure should help shed light on the timing of future events.
On some level, we believe the case for significant change at Darden could be strengthened on December 20th, when the company reports FY2Q14 results. In our view, current street estimates remain disconnected from reality. The current estimate for DRI's FY2Q14 is $0.22 and we believe that $0.12 - $0.15 is a better number.
Below, we share incremental thoughts on DRI’s fundamentals.
- The 2nd quarter is traditionally the lowest for the company, seasonally.
- Seafood inflation will accelerate meaningfully q/q and will continue for the balance of the year.
- Same-restaurant sales trends have been disappointing so far.
- DRI has not introduced any new promotional items and still has the promotional items that have not been working.
- There is no cohesive plan to fix the crown jewel – Olive Garden.