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MONDAY MASHUP: DRI, YUM, NDLS AND MORE - watchhh

Events This Week

3/03       DRI business update call

3/04       IRG earnings call at 5:00pm

3/05       BOBE earnings call at 10:00am

3/06       JMBA earnings call at 5:00pm

3/06       GMCR annual general meeting

Recent Research

2/24       STOP THE RED LOBSTER SPINOFF

2/25       BLMN: BEAT & GUIDE DOWN

2/27       DARDEN RESTAURANTS HEDGEYE POLL

2/28       COMMODITY CHARTBOOK

Recent News Flow

FLASH UPDATE: DRI  guides 3Q14 EPS down 11 cents to $0.82 and estimates that lower sales and extreme winter weather will contribute to approximately seven cents of this decline. In addition, management released same-restaurant sales estimate for 3Q, which include Olive Garden down 5.4%, Red Lobster down 8.8%, Longhorn up 0.3% and SRG down 0.7%. Despite this, management reaffirmed its prior FY14 guidance which includes a 15-20% YoY decline in diluted EPS. We continue to like Darden on the long side with the expectation that the activist will be successful in forcing significant change.

2/24       DRI Starboard Value announced its intent to call a special shareholder meeting to halt the spin-off of Red Lobster.

2/24       BAGL President and CEO Jeff O’Neil resigned; Michael Arthur was immediately named as interim President and CEO and the search for a permanent replacement is underway.

2/28       TAST was upgraded to strong buy at Raymond James with a price target of $10.

2/28       TriArtisan Capital Partners, in conjunction with Sentinel Capital Partners, is expected to purchase TGI Fridays.  The final terms of the deal are currently unknown.

2/29       THI Tim Horton’s announced its intent to buyback up to 1.47m under its share repurchase program.

3/01        YUM was featured in Barron’s this weekend.  Barron’s is bullish on the company’s strategy in China and expansion into other emerging markets.  Barron’s thinks YUM can deliver stronger earnings growth than the street is currently expecting and placed an $85 price target on the company.

3/01        NDLS, PBPB were featured in The Trader column in Barron’s this weekend.  The author was notably negative on these two names, citing weak comp growth and extreme valuations.  The article also pointed out that CMG, for example, continues to deliver exceptional comp growth and looks cheap by comparison.

Macro U.S. Consumption

Last week was a strong week for consumer stocks, with the XLY up 2.5% versus the SPX up 1.3%.  Despite this, the Hedgeye U.S. Consumption Model is flashing predominantly red with only 3 of the 12 metrics we track flashing green.  These data points are consistent with our bearish view on the casual dining industry as people are struggling to find the time, money and motivation to get out of the house and spend at these restaurants.  Earnings revisions, highlighted in a couple of charts later in the post, are also consistent with this view.  Despite the majority of casual dining restaurants seeing their earnings estimates notably revised downward, the stocks have held up fairly strong.  It appears to us as though price is not currently tracking fundamentals.

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From a quantitative set-up, the sector is bullish on an intermediate term TREND duration.

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Below we look at the performance of restaurant companies relative to the XLY and recent trends in earnings revisions estimates.

Casual Dining Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: KONA +9.3%, DFRG +8.0%, BLMN +7.9%, BWLD +7.1%, RT +5.8%

Negative Divergence: RUTH -11.5%, BAGL -8.0%, DRI -2.4%, CBRL -1.1%, TXRH -0.5%

Notable 1-Month Earnings Revisions:

Positive Revision: RRGB +1.6%, RT +1.0%, BWLD +1.0%

Negative Revision: BJRI -23.7%, KONA -11.8%, BBRG -6.9%, DIN -5.2%, BLMN -4.3%

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Quick Service Restaurants

Top 5 Week-Over-Week Divergent Performances:

Positive Divergence: TAST +10.2%, DPZ +5.4%, PZZA +4.3%, KKD +3.3%, SONC +1.8%

Negative Divergence: GMCR -13.3%, WEN -5.7%, SBUX -4.7%, MCD -3.9%, PNRA -3.6%

Notable 1-Month Earnings Revisions:

Positive Revision: JACK +3.1%, DPZ +1.0%, YUM +0.9%, BKW +0.3%

Negative Revision: TAST -8.1%, BAGL -5.9%, PNRA -4.8%, PLKI -4.6%, PZZA -3.5%

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Howard Penney

Managing Director