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Takeaway: We suspect 2QF14 will be ugly, but we are bullish on the long term prospects of Darden.

Editor's note: Hedgeye Managing Director and Restaurants analyst Howard Penney added Darden (DRI) to our Best Ideas list as a long on 10/10/13.  That being said, he expects the company’s 2QF14 earnings release on Thursday to be a disaster as its two largest brands, Olive Garden and Red Lobster, continue to struggle. Here's an excerpt from a note he wrote earlier today.

BEST IDEA UPDATE: LONG DRI

Our bull case is centered on the inherent value of Darden.  As we’ve been saying for the majority of the year, we believe the business is grossly mismanaged and in need of a major overhaul.  Barington Capital entered the fray as an activist back in October, but has been relatively quiet since then. That changed this morning, when the company released an 84 page report detailing its recommendations to improve long-term shareholder value at Darden.  

If these changes are implemented, Barington values Darden’s stock between $71 and $80 per share.  If our plan to fix Olive Garden is implemented, we see even more upside in the stock.

Best Idea Update: $DRI - how2

The full report, featuring several of our own quotes, can be accessed HERE.  Barington intends to promptly share these recommendations with Darden Chairman and CEO, Clarence Otis.

Best Idea Update: $DRI - dar5

If Barington, or another activist, is successful in forcing change, we would expect significant shareholder value creation.  In our opinion, the most value will be created from cutting excessive G&A spending and turning around the company's crown jewel, Olive Garden.  You can read more about the activist situation and our thoughts on the matter in a recent article published by Barron’s: Darden Shares Could Jump 40% On Hedge Fund Plan.

Click here to watch Penney's video "Darden: Major Upside Coming?"

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