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BLMN: BEAT & GUIDE DOWN

BLMN remains on the Hedgeye Best Ideas list as a SHORT.

 

 

SOLID 4Q13 RESULTS

BLMN reported 4Q13 results mostly in-line with expectations before the open.  Total revenues of $1.051 billion and adjusted EPS of $0.27 slightly beat expectations by $3m and $0.01, respectively.  Total revenues increased 5.2% YoY, driven by revenues from new restaurants, an increase in comparable sales and the consolidation of one-month of sales generated by Brazil operations.  EPS growth was driven by marginally stronger restaurant level margins, due to higher AUVs and productivity savings, and lower corporate and compensation expenses.

 

Comparable store sales at BLMN’s two biggest brands fell short of street estimates.  System-wide, Outback and Carrabba’s comps missed expectations in 4Q13 by 10 bps, 50 bps and 50 bps, respectively.  Outback and Carrabba’s disappointed despite growing their lunch business by a large margin in 4Q.  At the end of the quarter, weekday lunch was being offered at approximately 35% of Outback locations and 40% of Carrabba’s locations.  This is up significantly from the third quarter, when only 26% of Outback locations and 28% of Carrabba’s locations offered weekday lunch.  With this degree of daypart expansion, these two concepts should be expected to grow traffic and outperform the industry.  Outback only managed to grow traffic 0.5% and management didn’t reveal traffic trends at the Carrabba’s brand.  Bonefish and Fleming’s comps beat expectations in 4Q13 by 80 bps and 70 bps, respectively. 

 

Although 4Q13 was a difficult quarter for many casual dining operators, BLMN managed to outperform the Black Box Index by 150 bps.  The 1.4% system-wide comp growth was driven by increases in price and traffic, partially offset by a lower mix due to lunch expansion.  This number also benefitted 40 bps from a calendar shift in the quarter.  Traffic grew by 0.3% in the quarter, consistent with what is to be expected of a company rolling out lunch across multiple brands.


Two-year sales trends remain weak across all four concepts.

 

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GUIDING DOWN FY14

Street estimates for FY14 proved too aggressive as management reigned in guidance and expectations across the board.

 

FY14 Financial Outlook

*Guidance indicates the low-end of management’s range

BLMN: BEAT & GUIDE DOWN - 2 25 2014 1 10 52 PM

 

BLMN: BEAT & GUIDE DOWN - blmn eeg

 

 

There were clearly some positives in the quarter, but there are also several signs that the underlying trends are not as strong as management is portraying.  That being said, we will revisit our short case and provide an updated outlook in the coming days.

 

 

 

Howard Penney

Managing Director

 


$DRI: Mr. Market (Still) Doesn't Like Darden's CEO

Takeaway: Darden management's "strategic plan" could do more harm than good.

Editor's note: What follows below is a brief distillation from Hedgeye Restaurants Analyst Howard Penney's institutional research note yesterday. If you are an individual investor and would like more information on how you can subscribe to Hedgeye click here. Institutional investors, please ping sales@hedgeye.com.

 

$DRI: Mr. Market (Still) Doesn't Like Darden's CEO - lobster

  • We woke up to news today that activist investor Starboard may call a special meeting to halt Red Lobster's spinoff. 
  • As we wrote in our note, “Clarence’s Legacy, A Half-Baked Plan,” back when the plan was announced, Darden CEO Clarence Otis’ legacy will be defined by his unwillingness to make the changes necessary to create significant value for shareholders. 
  • The takeaway from stock action (and, in our opinion, sentiment since 12/20/13) is DRI rallies when there is movement toward replacing management and sells off when management publicly digs their heels in.
  • All told, the plan presented in December seems reactionary and hastily put together.  It fails to address declining traffic, margins and relevance as well as potential solutions to these issues.
  • After a series of conversations with industry insiders and some independent thinking, we’ve concluded that Darden’s strategic initiatives could actually end up destroying shareholder value.
  • Our plan creates four operating companies focused on: Italian, Seafood, Steak and Growth.  This would properly allow for intensive focus on guest targets and specific brand priorities in each respective category.

$DRI: Mr. Market (Still) Doesn't Like Darden's CEO - penney1

 

$DRI: Mr. Market (Still) Doesn't Like Darden's CEO - penn2

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.64%
  • SHORT SIGNALS 78.57%

Sell: SP500 Levels, Refreshed

Takeaway: As for the fundamental reality of #InflationAccelerating’s impact on growth, I don’t think the market cares until it has to.

Editor's note: This complimentary unlocked research note by CEO Keith McCullough was originally published February 24, 2014 at 13:02 in Macro. For more information on how you can subscribe to Hedgeye click here.

POSITIONS: 5 LONGS, 6 SHORTS @Hedgeye

 

Why the ramp right back to the all-time SPY highs? Surprisingly, there was a net short position (futures and options contracts) of 93,465 (Index + E-mini) in SPX on Friday’s close. Unwinding some of that happens on green, not red.

 

As for fundamental reasons, evidently the machines still love the smell of Burning Bucks (Dollar Down again today) as the hyper-mo-mo SPX vs USD inverse correlation (15 days) has moved to -0.94.

 

Sell: SP500 Levels, Refreshed - burningdollars

 

As for the fundamental reality of #InflationAccelerating’s impact on growth, like in Q1 of 2011 (when we made the same bearish call on US consumption), I don’t think the market cares, until it has to (which can start from today’s overbought price inasmuch as any other).

 

Across our core risk management durations, here are the lines that matter to me most:

  1. Immediate-term TRADE overbought = 1859
  2. Immediate-term TRADE support = 1816
  3. Intermediate-term TREND support = 1791

In other words, TREND support is -3.7% versus the price on your screen right now (#RealTimeAlert to short SPY = $186.11 at 12:19PM EST) , and I don’t think it will take this market much (a down day will do) to re-test that level of 1791.

 

If the US government burns its currency like Venezuela did, the SP500 could be up another +450% from here. But don’t worry about that. I’m sure that would be great for someone  - just not for American GDP.


KM

 

Keith R. McCullough
Chief Executive Officer

 

Sell: SP500 Levels, Refreshed - keithchart1

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Durability

“To defeat the aggressors is not enough to make peace durable.  The main thing is to discard the ideology that generates war.”  

- Ludwig von Mises


Von Mises is considered by many to be one of the fathers of libertarian thought in the United States.  He wrote, lectured and taught broadly on many topics beyond economics, including sociology, philosophy, and engineering.  As his student F.A. Hayek said, he was “one of the best educated and informed men I have ever known.”

 

Despite von Mises massive amount of writing and incredibly influential friends and students, such as Jacques Rueff the monetary advisor to Charles de Gaulle, Italian President Luigi Einaudi, and novelist Ayn Rand to name a few, there were periods in his career in which von Mises work was largely ignored.  Nonetheless, his ideas remained durable.

 

Durability - 34

 

The animal kingdom has some profound examples of durability as well.   Three of the best examples of durability include:

  • Planarian worm – Can regenerate large portions of its body and if cut in half can become two separate functioning worms;
  • Cockroach – Has extreme radiation resistance  (likely to survive a nuclear war), can survive for weeks with its head cut off and can live for months without food; and
  • Rat – Fine swimmers, can chew through steel, can go for a couple of weeks with no food or water and can eat almost anything as a diet.

Luckily, living in the modern world doesn’t require us to go for weeks without food or chew through steel, but as stock market operators the first two months of the year have required durability.  Specifically, January started with an almost 6% dive in the SP500 and February has seen more than a hundred point positive recovery.   Obviously timing the markets is a much chagrined strategy, though an ability to do so would certainly have helped in the first two months of the year.

 

Back to the Global Macro Grind...

 

On the topic of durability, any investor that has put money into Brazil over the past four years has had to endure a halving (think Planarian worm) of the Brazilian stock market.  In part, which is highlighted in the chart of the day, this has been driven by the dramatic decline in Petrobras (PBR), the largest single component of the Bovespa.   As the chart of the day shows, from its peak PBR has lost more than 80% of its value.

 

This coming Thursday at 11am ET, we are going to host a conference call on Brazil with the explicit title, “Brazilian Equities Down -50% From 2011 Peak, Time to Buy?” On the call, we will review the bearish thesis, but take a more opportunistic look at getting long of Brazil.  At ~ 7.0x earnings versus a peer mean of ~12x earnings, PBR may be an interesting way to play a recovery in Brazilian equities.  If you aren’t currently a Macro subscriber, please email for details on how to access the call.

 

On the macro news flow front this morning, China is once again dominating.  While most global stock markets are either up or down small, the Shanghai Composite is down just over 2%.  There are three key factors that appear to be weighing on Chinese equities:

  • The Shanghai Property Index closed -2.2% and hit a fresh 8 month low;
  • Many of the major publicly traded developers continued to sell off, even as the major banks all said there was no change to real estate related loan policy and have not halted real estate financing operations; and
  • Finally, there was a report that an Executive Director of the Bank of China was arrested in a corruption probe.

The key benefit to Chinese investors of increasingly liquid stock markets is that they can get out of the way, and remain durable, by selling, which they did in spades in the last 24 hours.

 

Flipping back to the U.S. for a second, it is interesting to note that the SP500, and equities generally, have recovered nicely in February, the assets and sectors that are performing the best remain those that most embody slowing growth and accelerating inflation.  Specifically, while the SP500 is now down only -0.04% on the year, gold is up +10.9%, healthcare is up +6.9%, and utilities are up 6.5%.  So, yes, slowing growth and accelerating inflation endures!

 

Interestingly, from a stock perspective, the fact that lower yielding stocks outperformed last year actually benefited a number of short calls we made in the MLP sector.  Disappointing MLP fundamentals only added to the macro tailwind last year, which carried into this year when one of our Best Idea shorts Boardwalk Partners (BWP) got cut in half after reducing their distribution by 80%. 

 

The next big short on our horizon, and on our Best Ideas list, is Kinder Morgan (KMI).   Barron’s kindly quoted my colleague Kevin Kaiser and wrote this weekend:

 

“Kinder Morgan's valuation is crazy," says Kevin Kaiser, an energy analyst at Hedgeye, an independent Connecticut research firm and the company's most visible critic. "The distributable cash flow is overstated because the maintenance capital is understated." He thinks Kinder Morgan MLP units could drop below $50 and the GP below $20 -- both roughly 40% lower than the current quotes.”

 

Tomorrow, Kaiser will be discussing the durability of Kinder Morgan and MLP accounting in a conference call with energy accounting expert Julie Hannink from CFRA (email for details).   It’s not clear to any of us that MLPs or their distributions are durable enough to be starved of capital expenditures. 

 

Our immediate-term Macro Risk Ranges are now as follows:

 

SPX 1 

UST 10yr Yield 2.68-2.81% 

VIX 13.44-15.66 

USD 79.81-80.51 

Gold 1 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Durability - chartofday

 

Durability - virtual


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