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DARDEN - RESTAURANT IMPOSSIBLE: FIXING OLIVE GARDEN

Takeaway: “Good morning, Mr. Otis. Your mission, should you choose to accept it, involves the recovery of lost customers from your core business"

“Turning around a failing restaurant is a daunting challenge under the best of circumstances.”

-          Robert Irvine, Restaurant Impossible on the Food Network

 

To steal the structure of the opening line from Mission Impossible: “Good morning, Mr. Otis.  Your mission, should you choose to accept it, involves the recovery of lost customers from your core business Olive Garden.”

 

Needless to say, fixing Olive Garden is going to be a daunting challenge.  Will the introduction of a burger and fries to the menu make the challenge more or less daunting?  In our opinion, it may very well be the final straw that breaks the camel’s back and drives shareholders to the tipping point.

 

In March 2013, our call was that an activist investor would get involved to make the necessary changes at Darden; many of which we’ve been chronicling.  Since Barington filed on the company, nearly every research report written about Darden has focused on a breakup/real estate analysis and valuation.

 

None of these notes, however, focus on fixing the core business – Olive Garden.  We believe the biggest upside in the stock today would come from the successful turnaround of Darden’s most important franchise in the portfolio.  Yet, management has not even begun to outline a cohesive strategy to fix Olive Garden.

 

DRI will report 2QFY14 results on December 20th.  This call will be the most important call of CEO Clarence Otis’ career.  His choice of direction will determine if a dramatic shift in strategy is pursued at Darden to provide the necessary focus in order to achieve significant increases in shareholder value, or if the company will continue with the status quo.  As we see it, the company could push forward in one of three different directions:

  1. Adopt the Hedgeye or Barington model of breaking up the company. 
    • This strategy is intended to significantly increase shareholder value.
    • It would not be unlike what McDonald’s successfully accomplished over a decade ago by focusing on its flagship brand to build enormous value, and spinning off Chipotle, Pret a Manager and Boston Market, each of which also achieved significant increases in value due to a newfound focus.
    • Brinker has also recently achieved strong success with Chili’s in the casual dining sector by focusing on this flagship brand, and spinning off several of its smaller brands.
  2. Throw shareholders a bone by making another small cut to its growth capital expenditures.
  3. Do nothing and push forward with the current flawed strategy.

On some level, we believe the case for significant change at Darden could be strengthened when the company reports 2QFY14 results.  An earnings miss is very likely.  The street currently expects EPS to come in around $0.22, but we are modeling somewhere between $0.12-$0.15.  Despite the string of recent disappointments, we could see management digging their heels in and sticking with the “change nothing” philosophy.

 

Their overall strategy is uncertain.  What appears certain, however, is that we may not hear a comprehensive nor compelling plan to fix Olive Garden on this earnings call.

 

Olive Garden is a brand with tremendous future value if it were in the right hands.  Olive Garden is no longer the “Italian” brand that made it so successful.  If you recall, the brand was on the brink of extinction back in 1994, before it experienced an Italian Renaissance.  This revival led to 57 consecutive quarters of same-restaurant sales increases and consistent margin improvement, leading to accretive value creation and substantial incremental value for all Darden shareholders.

 

Unfortunately, the brand has gone so inexplicably and destructively off course since this "industry leading performance."  Once again, Olive  Garden has moved so far away from its core vision of “Genuine Italian Dining,” to the point where it now feels more like an “Italian Applebee’s.”  And this was before Olive Garden introduced a burger and fries to the menu!

 

Olive Garden is out of touch with the consumer base in aggregate, but has particularly lost its relevance as it pertains to Millennials.  Where is the vision for this brand?  Is it reasonable to believe that Millennials want 1990’s style Americanized food that is fried, overly stuffed with cheeses, covered in cream sauce and served with overcooked pasta?    

 

And now on the heels of a “Buy One, Get One Free to Take Home” promotional offer, the recent roll-out of hamburgers will most likely turn out to be an act of desperation, and ultimately yet another mistake in a series of ill-advised decisions.  The idea that this will lead to incremental customers is nothing short of facile, a futile hope that a burger and fries will recoup the lost authenticity of the concept’s roots, and a hope that the shine of a hamburger will blind the customer to the fact that there is a lack of progressive thinking anywhere in the company.  There is an overall sense of fear and confusion that has led to a significant decline in consumer acceptance.

 

Olive Garden needs a talented team that can bring innovation back to the company.  It needs “fresh eyes” that are forward looking to create positive change.  It needs improved, more authentically Italian food.  It needs leadership that will ensure consistency of execution to deliver the required financial results on an on-going basis.   

 

Olive Garden is still a large and well-known brand.  It once had a crystal clear and compelling vision that was executed flawlessly to achieve the largest turnaround in casual dining history.  This performance can be realized again with the right team in charge.  Shareholders deserve better.

 

Restaurant impossible will be possible with the right vision, the right leadership, and a management team that can look ahead of the legacy issues plaguing the company!

 


About That No-Taper Trade...

Client Talking Points

ASIA

Witness the broad-based selling in Asian Equities overnight (Hong Kong down -1.7%, China down -1.5%, KOSPI down -0.8%). Why? The world’s growth expectations are getting rightly concerned about importing inflation via a renewed USA Burning Buck strategy (“sequester relief!”). The US Dollar is down for FIVE straight weeks. Atta boy Bernanke. No-taper is killing whatever was left of Fed credibility.

INFLATION

It's back! After bottoming in mid-November, one proxy for global inflation (CRB Commodities Index) has put in a big +3% move off the year-to-date lows (the CRB Index was down -8% year-to-date on the lows, fueling real-consumption growth). Almost every major economic region (other than Europe because they have #StrongCurrency) will see inflation pickup sequentially in Q1 verses Q4.

GOLD

Being long no-taper/inflation expectations is cool, but only to a price. After crashing this year, the price of Gold will take time to bottom. (Remember, it’s a process, not a point). We sold our trading position in Gold at the top-end of our immediate-term $1216-1261 risk range yesterday. We will buy it back if it confirms another higher-low on this pullback.

Asset Allocation

CASH 42% US EQUITIES 10%
INTL EQUITIES 12% COMMODITIES 6%
FIXED INCOME 6% INTL CURRENCIES 24%

Top Long Ideas

Company Ticker Sector Duration
FXB

Our bullish call on the British Pound was borne out of our Q4 Macro themes call. We believe the health of a nation’s economy is reflected in its currency. We remain bullish on the regime change at the BOE, replacing Governor Mervyn King with Mark Carney. In its October meeting, the Bank of England voted unanimously (9-0) to keep rates on hold and the asset purchase program unchanged.  If we look at the GBP/USD cross, we believe the UK’s hawkish monetary and fiscal policy should appreciate the GBP, as Bernanke/Yellen continue to burn the USD via delaying the call to taper.

WWW

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

TROW

Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road

TWEET OF THE DAY

COMMODITIES: Burning Buck continues to re-fuel the commodity inflation bubble @KeithMcCullough

QUOTE OF THE DAY

"Confidence comes not from always being right but from not fearing to be wrong." - Peter T. McIntyre

STAT OF THE DAY

Budget deal? The U.S. national debt is approaching $17,224,000,000,000.


THE M3: SMOKING ZONES; CONCESSIONS; SLOT PARLOUR BUSES

THE MACAU METRO MONITOR, DECEMBER 11, 2013

 

 

EIGHT GAMING VENUES SUBMIT SMOKING REDUCTION PLAN Macau Business Daily

The Health Bureau said last night only eight of 14 current gaming venues that previously failed a second round of air quality checks in smoking zones have said how they will respond to punitive action by the government.  The sites that submitted plans yesterday were:  VIP Legend (SJM license), Diamond (SJM licence), StarWorld, MPEL (Royal Mocha, Mocha Taipa Square, Mocha Golden Dragon, Mocha Sintra, and Mocha’s Casino Taipa Square).

 

Those failing venues that have not yet submitted plans to reduce their smoking areas are all SJM-licensed, namely: Jimei; Emperor Palace Casino; Lan Kwai Fong; Kam Pek; Golden Dragon and Grandview Casino.

 

The Health Bureau didn’t say what specific action those meeting the deadline for smoke zone reduction had proposed. Nor did it state what further sanction – if any – would be faced by those that missed last night’s deadline.

 

Publicly, VIP Legend has suggested airport-style smoking rooms with no gaming machines or tables.  

 

GOVT HAS NO INTENTION TO INCREASE GAMBLING CONCESSIONS Macau Daily Times, Macau News

Secretary Tam said that the government is not at this stage considering increasing the number of gambling concession recipients during their review of the concession system in 2015 and 2016.  “We’ve said that we are going to conduct a review in 2015 and 2016. But the issues that we will be considering do not include whether or not to increase the number of concessionaires”, said the Secretary.  He added that part of the criteria to determine how many gambling tables a concessionaire will be allowed includes the proportion of non-gambling elements in their projects. 

 

SJM’s concession and MGM’s sub-concession expire in 2020. For everyone else, it’s 2022.

 

FRANCIS TAM CRITICIZES SLOT MACHINE PARLOR SHUTTLE BUSES Macau Daily Times

Secretary Tam said, "We would like to reiterate the original intention (of the regulations) to the gambling corporations. No matter what manner the slot machine parlors are operating in, the dispatchment of shuttle buses to transport customers can be said to be a violation of our intention to remove slot machine parlors from the community."  He continued to speculate on the reasons behind the violations: “I think they (the gambling corporations) understand the intention of the government. But they might not realize that this practice (the sending of shuttle buses) is against the original purpose that they agreed upon,” said the Secretary.  

 



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December 11, 2013

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BULLISH TRENDS

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BEARISH TRENDS

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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – December 11, 2013


As we look at today's setup for the S&P 500, the range is 30 points or 0.98% downside to 1785 and 0.69% upside to 1815.                                                    

                                                                           

SECTOR PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

EQUITY SENTIMENT:

 

THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  

 

CREDIT/ECONOMIC MARKET LOOK:

  • YIELD CURVE: 2.51 from 2.50
  • VIX  closed at 13.91 1 day percent change of 3.11%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Dec. 6 (prior -12.8%)
  • 10:30am: DOE Energy Inventories
  • 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
  • 1pm: U.S. to sell $21b 10Y notes in reopening
  • 2pm: Monthly Budget Statement, Nov., est. -$140b

GOVERNMENT:

    • 8:30am: NTSB holds investigative hearing on crash landing of Asiana Airlines flight 214 at San Francisco Intl Airport
    • 9:15am: Senate Finance Cmte reconvenes confirmation hearing on John Koskinen to take over as chief of IRS
    • 10am: House Energy and Commerce Cmte panel hears from HHS Secretary Kathleen Sebelius on Affordable Care Act
    • 10am: Senate Environment Cmte hears from EPA, Energy, Dupont on renewable fuels standard and ethanol
    • 10am: Michael Gibson, director of Fed bank supervision, speaks at panel discussion on insurance industry in Washington
    • 1pm: House Ways and Means panel holds hearing on identity theft, with acting IRS Commissioner Daniel Werfel
    • 3pm: House Armed Services Cmte panel hears from Congressional Research Service on People’s Liberation Army

WHAT TO WATCH:

  • U.S. budget negotiators reach deal easing spending cuts
  • EU finance chiefs set creditor-writedown rule parameters
  • FCC set to approve in-flight calls as Congress resists
  • NSA using Google cookies to pick hacking targets: Wash. Post
  • Costco net misses ests. as warehouse chain boosts discounts
  • MasterCard to buy back $3.5b in shrs, boosts qtrly div 83%
  • Foxconn may start funding startups for wearable technologies
  • Chinese drugmakers may see increased FDA scrutiny
  • IEA raises 2014 global oil demand forecast on U.S. recovery

EARNINGS:

    • Hudson’s Bay (HBC CN) 7am, $0.10
    • Joy Global (JOY) 6am, $1.12 - Preview
    • Laurentian Bank of Canada (LB CN) 8:40am, $1.31
    • Men’s Wearhouse (MW) 5:30pm, $0.86
    • Nordson (NDSN) 4:30pm, $0.94
    • Oxford Industries (OXM) 4pm, $0.11
    • Vera Bradley (VRA) 4:03pm, $0.33

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  • IEA Boosts 2014 Global Oil Demand Forecast on U.S. Recovery
  • Gold Retreats From Three-Week High as Investors Weigh Rally, Fed
  • Colombian Rebels Seen Blocking Farmland Overhaul: Commodities
  • Coffee Spread Falls From Record on Vietnam Sales; Cocoa Retreats
  • Nickel Leads Metals as Investors Add to Bets on Higher Prices
  • WTI Trades Near Six-Week High; IEA Boosts 2014 Demand Estimate
  • Wheat Rebounds From 18-Month Low as Demand to Gain After Drop
  • Thailand to Reinstate Natural Rubber Exports Fee From January
  • Chinalco Copper Output Cuts Set To Help Trim Global Surplus
  • U.S. Sees Least Volatile Oil Prices in 17 Years: Energy Markets
  • Solar Boom Boosts South Africa Salaries With 25% Jobless: Energy
  • Wall Street Exhales as Volcker Rule Seen Sparing Market-Making
  • Sugar Rout Deepening on Weaker Real, Thai Baht: Chart of the Day
  • Robusta Coffee Seen Dropping as Vietnam Sales Set to Accelerate

THE HEDGEYE DAILY OUTLOOK - 5

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - 6

 

GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 3

 

THE HEDGEYE DAILY OUTLOOK - 4

 

EUROPEAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 7

 

ASIAN MARKETS

 

THE HEDGEYE DAILY OUTLOOK - 8

 

MIDDLE EAST

 

THE HEDGEYE DAILY OUTLOOK - 9

 

 

The Hedgeye Macro Team

 

 

 

 

 

 

 

 

 

 

 

 

 


Confidence? No Thanks

This note was originally published at 8am on November 27, 2013 for Hedgeye subscribers.

“Well, there’s not a day that goes by when I don’t get up and say thank you to somebody.”

-Rod Stewart

 

Roderick gets it. The youngest of five kids, he wasn’t born into poverty or affluence. The 68 year old rocker from Highgate (North London) was born on my wife’s due date (pending baby #3 for us in January). And God knows, I have nothing but thanks for my family’s health and happiness as we move closer to game time.

 

I also wanted to take some time to thank you, our clients, for making all that we’ve set out to achieve here @Hedgeye possible. We’re going on 6 years since the founding of our firm. You’ve helped us create 50 jobs in America. For that I’m forever grateful.

 

With achievement comes great responsibility. Now that we have our new @HedgeyeTV studio and office space built out in Stamford, CT we’re looking forward to being the change we all want to see in both our community and profession.

 

Back to the Global Macro Grind

 

Change starts with being transparent and accountable. All great American (and Canadian) Patriots have held their government to account. While hope is not a reputational management strategy, I sincerely hope you see some of my anti-government rants in that light.

 

Yesterday’s declining US Consumer Confidence reading is case and point. While the US government and its un-elected @FederalReserve refuses to acknowledge this, there’s an implicit link between:

 

A) The Purchasing Power of The American People

B) US Consumer Confidence

 

In real-time economic strategy speak, we call these coincident indicators. As you can see in Christian Drake’s Chart of the Day (US Dollar vs. US Consumer Confidence going back to January, 2013), the following conclusion is also explicit:

 

1. The US Dollar locked in her YTD highs in the May-July period

2. US Consumer Confidence peaked in mid-July of 2013

 

Not only did confidence peak; now, alongside the US Dollar (down 3 weeks in a row), it’s starting to plummet. While the chart we are showing is the University of Michigan’s reading, every single US Consumer & Business Confidence survey we track looks the same:

 

1. US Conference Board Consumer Confidence reading for NOV = 70.4 vs 81.0 in JUL

2. University of Michigan Consumer Confidence reading for NOV = 72.0 vs 85.1 in JUL

3. NFIB Small Business Optimism reading for OCT = 91.6 vs 94.1 in JUL

 

In other words, as the US government signs off on this no-taper-zero%-rates-on-savings-US-Dollar-devaluation lie, the American people aren’t buying it.

 

Why? Because everyone who is literate in real-world economics realizes that the current @FederalReserve Policy To Inflate is only good for high income earners in America who are long of the @PIMCO Total Return fund and/or stocks, art, bubbles, etc…

 

Within another US Consumer Confidence data series, look at the Bloomberg Consumer Comfort readings by Income bracket:

 

1. INCOME $40,000-50,000 confidence reading for NOV = -45.6 vs -23.1 JUL

2. INCOME > $100,000 confidence reading for NOV = +16.9 vs 17.0 JUL

 

Notwithstanding the obvious (that low-income earners all have NEGATIVE confidence readings to begin with), this is a national embarrassment; especially for a US President who campaigns explicitly with class warfare words. Obama, what about the “folks?”

 

I didn’t grow up in a community where we assigned people to different “classes.” I’m the son of a firefighter and teacher who put two feet on the floor every morning just like everyone else. And when someone less fortunate than me needed help, it was my leadership responsibility to do so.

 

So I’d like to thank you again this morning for the opportunity to lead from the front. There has never been a country that has devalued its way to long-term economic prosperity. Perpetually devaluing the purchasing power of the poor (US Dollar) is wrong. And it’s our patriotic responsibility to end this never-ending-money-printing-policy before it’s too late.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.69-2.81%

SPX 1795-1809

VIX 11.91-13.61
USD 80.35-80.91

Brent 108.69-112.14

Gold 1226-1285

 

Best of luck out there today and Happy Thanksgiving to you and your loved ones,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Confidence? No Thanks - cdrake

 

Confidence? No Thanks - Virtual Portfolio


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