Takeaway: Make no mistake about it; Otis’ top priority is saving his job.


Starboard Value announced in a 13D filing this morning that it has retained former Brinker International CFO and EVP Charles Sonsteby to serve as an advisor in its battle against Darden Restaurants.  Starboard will pay $50,000 in cash to Mr. Sonsteby who will, in turn, use the proceeds to purchase Darden stock.


We view this as another favorable development for Starboard.  Adding the former Brinker CFO will help the activist bring sanity to Darden Restaurants.  In his role as the CFO of Brinker, Charles helped lead one of the great success stories in the new era of casual dining.  In this new era of casual dining, companies that focus on operating efficiently and doing one thing right create the greatest value for shareholders.  His experience and expertise makes him another extremely valuable asset.




Darden held a business call update yesterday morning to run through its strategic plan and rebuttal to activist pressure.


During the presentation, it became abundantly clear to us that the plan to spinoff Red Lobster was merely a hasty reaction to shareholder pressure.  Unfortunately, the activists don’t agree with this plan and are intent on stopping it.  Following the call, Barington Capital stated that it has lost confidence in the ability of Otis to manage the company.




Management preannounced 3Q14 results yesterday and, as we expected, they fell far short of consensus estimates.  Darden expects same-restaurant sales in the quarter to decline 5.4% at Olive Garden, decline 8.8% at Red Lobster, increase 0.3% at LongHorn and decline 0.7% at SRG.  While Olive Garden and Red Lobster continue to be the mismanaged brands we’ve become accustomed to, weak results at SRG, Darden’s growth vehicle, confirm our view that the Specialty Restaurant Group isn’t so special.  In order to fulfill its true potential, this group should be separated from the larger, more mature brands with divergent strategic and operational priorities.




The only thing new that came out of yesterday’s presentation was an in-depth look into Olive Garden’s Brand Renaissance plan.  Fixing Olive Garden has suddenly become management’s top priority.  While we agree with this positioning, and have been calling for it for the past year, we don’t have much faith in the current operating team.  This repositioning effort includes new lunch and dinner menus, nationwide remodels, a new approach to advertising and promotion, and even a new logo!  While we are impartial to the new logo, critics came out in full force on Twitter yesterday.







Look, we’ll give credit where it is due.  Management is, in a sense, taking an aggressive approach here no matter how reactionary it may seem.  With that being said, it concerns us that outside pressure was the driving force behind these changes.  A strong and capable management team would have made these changes a long time ago.  After a prolonged period of underperformance, we’ve lost confidence that the current team can spearhead a successful turnaround at the ailing brand.




Management intends to push forward with its plan to spin off Red Lobster.  According to them, this will remove an underperforming and volatile brand from the portfolio and separates the portfolio into two companies to allow each to focus on “separate and distinct opportunities to drive long-term shareholder value.”  We’ve been pretty forthright in our disagreement with this plan.  Based on management’s own numbers, and own chart, Red Lobster and Olive Garden have similar guest profiles as they both appeal to lower income consumers.  LongHorn Steakhouse, on the other hand, is the clear outlier as it appeals more to upper income individuals.  Management is talking out of both sides of their mouth.





Part of management’s rationale behind the Red Lobster spinoff was to allow both new companies to better serve their increasingly divergent guest targets.  This is nothing more than an excuse for management to rid itself of an underperforming brand that has become irrelevant under their watch.  The New Darden will still have divergent guest targets.


Management briefly discussed why other potential portfolio separation alternatives – including a spinoff of LongHorn/SRG – don’t make strategic sense.  Among several reasons offered was the potential for weak cash flows at SpinCo, a large amount of existing debt at NewCo, the jeopardizing of an investment grade rating and a likely cut to the dividend.  While all of these statements are legitimate, they don’t necessarily strike us as major concerns.  If Darden were to spinoff SRG or LongHorn/SRG, the SpinCo would most certainly be considered a growth company.  Weak cash flows and a cut to the dividend would not only be expected, but accepted as well.  Further, management avoided touching upon the advantages this would create for both NewCo and SpinCo, including a more intensive focus on similar guest targets, brand priorities and shareholder needs.


Management also offered up a rebuttal to the proposed separation of Darden’s real estate into a publicly traded REIT.  We don’t profess ourselves to be REIT analysts, so we’ll stay clear of this debate.  All we know is that both sides have supposedly done their due diligence on the proposal and both have come to vastly different conclusions.


The key takeaway from yesterday is that management is going on the offensive and we applaud them for that.  We did not, however, learn much new and are still unconvinced that the current team, under the proposed operating structure, can right the ship at Darden.  We plan to offer a more detailed analysis of management’s proposed spinoff at a later date.



Howard Penney

Managing Director



$ADDYY: Identity Crisis at Reebok?

Takeaway: The sports-driven retailer would be better off spending its cash on R&D.

Reebok says its new delta ‘brand mark’ is not a logo, but a symbol

  • "Reebok...said Friday that it is marking a shift in focus, in part by unveiling a new brand symbol. The delta, Reebok said, is not a logo but a symbol --- a symbol of change. And a 'way of life,' the brand added." 
  • “'The branding change coincides with Reebok’s singular focus on fitness,' the brand said in a press release. '... Through the millennia, the delta has been a symbol of change and transformation. The Reebok Delta has three distinct parts each representing the changes—physical, mental and social – that occur when people push themselves beyond their perceived limits and embrace an active and challenging life.'”

$ADDYY: Identity Crisis at Reebok? - chart4 3 4 large


We will never ding a company for changing up its marketing. Great marketing works. It is a key component to a company's success. That said, there is one thing we are certain of: great product does not need great marketing. On that front, Reebok needs to focus those precious marketing dollars on Research & Development.

Join the Hedgeye Revolution. 


LONG Lorillard (LO): Best Idea Call Today

Hedgeye's Consumer Staples team is adding long Lorillard (LO) to our Best Ideas list.


We are hosting a conference call today, March 4th at 11:00am EST to discuss the key points of our high-conviction bullish thesis. Consumer Staples Analyst Matt Hedrick will answer questions at the conclusion of the call.




  • We'll discuss our exclusive view on why we now believe Lorillard's advantaged menthol portfolio is essentially shielded from regulatory risk.*
  • We'll offer granular insight into long-term upside growth in Lorillard's leading electronic cigarette business "blu," as industry cigarette volumes decline.  
  • Got growth? We'll take a look inside Lorillard's continued stable (and profitable) sales and earnings growth outlook.

*A supplemental expert report on menthol by a top Washington, DC law firm involved in tobacco public policy is available by request.

Participant Dialing Instructions:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 825118#
  • Materials: CLICK HERE (Slides will be available approximately one hour prior to the start of the call)

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

LEISURE LETTER (03/04/2014)

Macau market shares, new casino in LV, and some cruise discounting




TODAY “Fat Tuesday”

  • CONEXPO-CON/AGG – Las Vegas thru Friday
  • PEB –  8:50 a.m. Citi Global Property CEO Conference           
  • HST – 9:30 a.m. Citi Global Property CEO Conference
  • SHO – 10:10 a.m. Citi Global Property CEO Conference
  • MAR – 11 a.m. Raymond James Institutional Investor Conference
  • HOT – 2:15 p.m. Raymond James Institutional Investor Conference
  • DRH – 4:15 p.m. Citi Global Property CEO Conference

Wednesday, March 5

  • STAY – 7:30 a.m. Citi Global Property CEO Conference
  • LHO – 9:30 a.m. Citi Global Property CEO Conference
  • RHP – 10:10 a.m. Citi Global Property CEO Conference
  • FCH – 11:30 a.m. Citi Global Property CEO Conference
  • HT – 12:10 p.m. Citi Global Property CEO Conference
  • MAR – Mitsubishi Seattle Consumer Conference
  • BYD – 4Q13 earnings, AMC, 5 pm call

Thursday, March 6

  • Todd in Boston


2014 expected to be a 'busy year' for Kansas Star Casino Wichita Eagle

Ground will be broken in mid-March or mid-April on a 10k sq ft meeting and convention space and on an equestrian center. Both are scheduled to be completed almost simultaneously in January 2015, although a handful of equestrian events will be held this year.  Efforts also are under way to book more acts at the Kansas Star Arena, which opened last year.  

Takeaway:  While regional capex hasn't produced consistently great ROIs in recent years, the Kansas Star is one of the better performing casinos in the country. While not disclosed, we think the spend is not overly material.


PENN –  On Wednesday, PENN will formally contest the Racing and Gaming Commission’s refusal to renew its Argosy Sioux City license.  On Thursday, a Polk County Court will hear PENN’s lawsuit against the commission’s awarding of the casino license to the Hard Rock casino.  Also on Thursday, the IRGC is expected to approve standard 1-yr renewals of the state-licensed casinos, with the exception of the Sioux City market.

Takeaway:  PENN's situation here is looking bleak. We're not sure all the analysts have removed Sioux City EBITDA from their 2015 projections


IGT – secured 50% floor share of games at the new SLS Las Vegas resort and casino and will feature 400 IGT games on the casino floor.  The SLS Las Vegas, the renovated Sahara, will open in August or September and will feature 1,630 rooms.

Takeaway:  On a 4Q rolling basis, IGT ship share has been trending in the mid-high 30s.  However, IGT typically garners a higher share of new casinos/expansion with volume discounts and product giveaways.


Four Season Hotels – announced a partnership with Simmons for a new bed which features an interchangeable mattress topper that allows guests to select firm, medium or soft and will be put in place upon advance request by the guest.  The program is the result of a Four Seasons/Ipso study that revealed 92% of guests have a preference for bed firmness. 

Takeaway:  Could this be the next big capex replacement trend for lodging – similar to previous, bed (Starwood), showers, large HD televisions? 


NCLH/RCL – Both Norwegian Cruise Line and Royal Caribbean International rolled out 'kids sail free' offers on new bookings made during March.  

Takeaway:  Promotions remain prevalent, particularly in the Caribbean 



Sands China replaces SJM as casino market leader Macau Business 

According to Business Daily, the breakdown of market share % is as follows:  Sands China 25%, SJM 22%, GALAXY 21%, MPEL 12%, WYNN 11% and MGM 9%. 

Takeaway:  LVS is our favorite Macau name.  While hold likely played a part in the Feb increase, we believe LVS remains a share gainer.


New Jersey Gaming – State lawmakers are calling for a casino in Bergen County – specifically at the Meadowlands.  Resorts World New York produced $435 million for the State of New York. By comparison, a Meadowlands casino is estimated to produce $350 million in tax revenues for New Jersey almost $100 million more than the current Atlantic City casinos combined.

Takeaway:   New Jersey officials must do something as Atlantic City gambling revenues are now less than 50% of peak and on-line gaming is underperforming early revenue and tax estimates.


Cyprus Gaming Expansion – The government has signed a contract with “Deloitte Ltd”, which was selected on January 29, following an international public tender procedure, to provide consulting services for the licensing of an integrated casino resort.  In July 2013, the Cypriot Government unveiled plans to grant one licence for an integrated casino resort on the island, as Cyprus scrambles to woo investment to offset a deep recession.

Takeaway:  Well known as a tax-haven, more recently the island experienced a tourism boom and is serviced by many low cost European airlines. 


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Riddle In An Enigma

“Russia is a riddle wrapped in a mystery inside an enigma.”

-Winston Churchill


In college, I wrote my senior essay on constitutionalism in post-Soviet Russia.  It was a great topic for an Ivy League kid and I had the privilege of being advised on the paper by General William Odom, a former head of the National Security Council under Ronald Reagan, and expert on Soviet affairs.  Despite my heroic efforts at primary research, the conclusion could have been shorter than a tweet.


Simply put, the rule of law was going to take time, perhaps generations, to take hold in Russia.  Unlike the United States and many Western nations, the history of Russia, even before Communism, was one of rule “by law” and not rule “of law”.  So, in effect, any new Constitution would simply be viewed by the people as an apparatus by which they were ruled, rather than a document that freed them.


Then, as now, it is impossible to analyze Russian action solely from the lens of the West.  Actions which may same outrageous to the West may actually be very subdued to the Kremlin.  


Riddle In An Enigma - poot


A quick review of any major Western media source is that there are two schools of thoughts in analyzing the current situation.  The first is that Putin is clearly violating the sovereignty of the Ukraine and will pay for it, likely economically.  The second is that Obama has largely been incompetent in dealing with Russia and is in a box because Putin has become his partner, of sorts, on Iran and Syria.


Stepping back though, it is worth viewing this from the Russian perspective.  For starters, Crimea, which is and has been recognized as a sovereign part of the Ukraine by Russia, is also the home to Russia’s Black Sea Fleet and will be until 2042 under an agreement between the two countries.  It is also a region that is almost 60% Russian speaking and ethnic Russian.  So, clearly, the Kremlin has vested interests in the Crimean peninsula.


Meanwhile, in overthrowing President Yanukovych, the Ukrainians overthrew a Russian ally who had been moving further away from the Europe and closer to Russian, including taking a recent $15 billion loan from Russia.  The current leadership in the Ukraine also does have some far right-wing elements.  Specifically, one of the three main leaders of the protest and the new deputy Prime Minister of the Ukraine, Oleh Tyahnybok, is the leader of the far-right ultranationalist Svoboda party that was allied with the Nazis in World War II.  (Tyahnybok has at times blamed the Ukraine’s problems on the “Jewish-Russian” mafia running the country.)


Back to the Global Macro Grind...


Clearly, from a Western perspective neither of the above factors, strategic interests in Crimea or extreme nationalists in the new Ukrainian government, justifies an invasion into sovereign Ukraine. Hence, the West is in uproar and among other things is threatening to pull out of the Sochi G-8 conference this summer and implement economic sanctions.  For his part, Putin has towed the line closely in Crimea; there have been no shots fired and little violence.  As well, so far, the Russians have not made a move into the mainland of Ukraine.


On some level, Putin also likely respects history.  Similar to Afghanistan, Crimea has been a thorn in Russia’s side historically. Russia also fought a war in the Crimea, against a British, French and Ottoman coalition, in the middle of the 19th century.  This war was an unmitigated disaster for the Russian Empire, then led by Nicholas I.  Not only did Nicholas I not live to see the end of the war, but his successor Alexander II signed the Treaty of Paris and initiated the biggest liberalization campaign in the history of Russia. 


Despite the fervor that was brewing on political TV this weekend, the perception based on a poll we took yesterday is that the situation in the Ukraine is actually favoring Putin vis-à-vis President Obama.  In fact, 78% of the respondents to our poll said Putin will come out stronger. Napoleon famously said:


“Never interrupt your enemy when he is making a mistake.”


Of course, it begs the question: who is making the mistake?


In all likelihood, the most significant reason that Russia is unlikely to escalate is an economic one.  Even as the Russian stock market is rallying this morning (perhaps an indication that the worst is behind us?), Russian asset prices have been decimated.  In the Chart of the Day, we show this with a chart of the Russian ruble, which is literally hitting all-time lows. Despite the Russian central bank aggressively raising interest rates by 150 basis points, the ruble continues to be better for sale.  Internally, a weak ruble is the worst economic outcome for Putin as it has the potential to drive inflation up dramatically. 


Externally, the most significant “river card” Russia has to play is its natural resources that much of Western Europe is dependent on.  Last year, Russia shipped 133 billion cubic meters of gas to Europe, including 40 billion to Germany, which was more than 1/3 of Germany’s supply.  Ultimately, Russia has become very economically integrated with the West and it is likely this integration that leads to resolution before escalation in the Ukraine. 


This all of course reminds me of the following joke:


A Ukrainian immigrant goes to the Department of Motor Vehicles to apply for a driver's license. 

He has to take an eye test. The clerk shows him a card with the letters: 

C Z W I X N O S T A C Z 

"Can you read this?" the clerk asks. 

“Read it?" the Ukrainian replies, "Heck, I know the guy!" 


Our immediate-term Risk Ranges are now as follows (our Top 12 macro ranges are in our Daily Trading Range product):


UST 10yr Yield 2.59-2.73%

SPX 1 

VIX 13.06-16.26 

USD 79.81-80.31 

Brent 108.78-111.21

Gold 1 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Riddle In An Enigma - RUB


Riddle In An Enigma - rta2

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