Takeaway: We continue to think the growth decelerating trend extends through 1H14.

Editor's note: This research note was originally published February 28, 2014 at 10:26 in Macro. For more information on how Hedgeye can help you click here.


We’ve been vocal in our expectation for a deceleration in the slope of domestic growth over the last couple months and while this morning’s downward revision to 4Q13 wasn’t particularly surprising, it does offer some positive confirmation to that view. 




With the dollar breaking down, #InflationAccelerating, earnings growth still sub-trend, wealth effect (equities/housing) momentum decelerating and little incremental upside for consumption growth via a reduction in savings, we continue to think the growth decelerating trend extends through 1H14. 


GIP MODEL REFRESH:  The net impact to our GIP (Growth/Inflation/Policy) model from this morning’s data is another incremental shift in trajectory towards quadrant #3 – Slowing Growth and Rising Inflation


To the extent that the market continues to discount slowing growth and subsequent, incremental easing in policy – which ironically/unfortunately only perpetuates the move into Quad #3 – we think slow growth exposure (gold/bonds/commodities/utilities) continues to outperform pro-growth leverage. 




GDP DATA SUMMARY:  Below we highlight the notables in this mornings, 1st revision to the 4Q13 GDP estimate. 


Real GDP:  revised lower by 80bps to 2.4% from 3.2%.  Decelerating 170bps QoQ to 2.4%. 

Nominal GDP:  decelerating 200bps QoQ  from +6% in 3Q13 to +4% in 4Q14. 


Inflation:  Inflation estimates marked higher with the GDP Price index and Core PCE measures revised up 30bps and 20bps, respectively. 


C+I+G+E Revision:  Investment revised up small, everything else revised lower.

C: Consumption saw the largest downward revision from a contribution perspective at -.53% with QoQ growth revised from +3.3% to +2.6%.  Durable/NonDurables/Services were all revised lower but Durables (as the latest PCE data has reflected) saw the largest decline.


Whether the emergent deceleration in durables, and luxury and higher-end durables particularly, represents a pull-back in spending across the top income quintiles as equity and home value gains slow remains to be seen. We’ll get the updated PCE detail data on Monday.  


I:  Investment:  Private Nonresidential Investment, which was revised higher by +0.4 from a contribution perspective and +3.5% from a growth perspective, was one of the lone bright spots in the report. 


Inventories were revised lower and with inventory-to-sales ratios continuing to creep higher through year end, its unlikely inventories provide another outsized boost to reported growth in the coming quarters. 


G + NE:  Government was revised down modestly while the revision to the trade balance was the second biggest contributor to the headline decline with export growth revised -2.0% against a +.60% revision for imports. 


Real Final Sales growth (GDP less Inventory Change):  decelerating 20bps QoQ to 2.3%…revised lower by 50bps

Gross Domestic Purchases (GDP less exports, including imports):  Very Weak sequentially - Decelerating 250bps QoQ to +1.4%..revised lower by 40bps

Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  (Perhaps) The cleanest read on aggregate domestic demand was also weak, decelerating 100bps to +1.2%, revised lower by 20bps.








#GROWTHSLOWING - Eco Summary 022714 



Christian B. Drake



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


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.

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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)

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.

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