Starboard released an investor presentation this morning, detailing its analysis of Darden management and the proposed Red Lobster spin-off.  Starboard believes Darden’s real estate portfolio is worth approximately $4 billion and that separating Red Lobster and its real estate from Darden’s portfolio would destroy approximately $850 million in value.


The presentation was deservedly highly critical of Darden’s current management team and is a must-read for interested parties.  Below, we highlight what we believe are the most important quotes from the 100+ page deck. 



A Perpetual Self-Serving Agenda

  • “It appears that the Red Lobster Separation was designed to benefit management, not shareholders.”
  • “We believe Darden has historically shown a blatant disregard for shareholder concerns, a propensity to silence critics, and is similarly now trying to avoid shareholder concerns and input when it comes to the Red Lobster Separation.”
  • “It appears the Board is going to great lengths to ensure that shareholders DO NOT have a say in the Red Lobster Separation.”
  • “We question whether compensation decisions are motivating management to rush the separation of Red Lobster.”
  • “We believe the current management team and Board have a long history of self-interested behavior and disregard for shareholders’ interests.”

Shareholder-Unfriendly Corporate Governance

  • “Darden maintains shareholder-unfriendly corporate governance provisions.”
  • “We do not believe the Board would sanction what we would view as an egregious violation of good corporate governance, like proceeding with the Red Lobster Separation in direct opposition to a clear shareholder directive, especially just months before a potential election contest.”
  • “Despite significant criticism from leading governance firms and shareholders regarding Darden’s poor governance practices, the Company has actually taken steps to further disenfranchise shareholders.”
  • “Darden’s corporate governance is unacceptable and recent Bylaw amendments have made things even worse.”
  • “Darden’s new Bylaw amendments serve to exacerbate Darden’s already alarming corporate governance concerns.”
  • “Rather than look out for the best interests of shareholders, it appears that Darden's Board has taken steps to further entrench themselves.”

Premeditated, Misleading Statements

  • “Management’s arguments in support of the Red Lobster Separation are highly misleading.”
  • “Management has misled shareholders regarding customer demographics at Red Lobster and Olive Garden.”
  • “Management has misled shareholders regarding potential debt breakage costs.”
  • “Management has misled shareholders regarding their own performance.”

The Ill-Advised Wall of Silence

  • “We are troubled by the Company’s continued attempts to avoid open discussion on what we believe to be the most important and difficult issues facing the Company.”
  • “Darden has a long history of silencing critics and trying to avoid an active dialogue on the key issues facing the company.”
  • “Management refuses to share key supporting assumptions to demonstrate how the Red Lobster Separation will create value.”
  • “Management has not adequately addressed Darden’s real estate value.”
  • “Despite repeated inquiries, management has refused to disclose the key valuation assumptions used for Red Lobster in the analysis that led management to conclude that the Red Lobster Separation is the best alternative available to create value for shareholders.”


Howard Penney

Managing Director


Fred Masotta




Surfing Legend Kelly Slater Calls it Quits | $ZQK

Takeaway: We applaud Quiksilver's restraint – which so few brands have when it comes to these ego-driven deals.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

Surfing Legend Kelly Slater Calls it Quits | $ZQK - kelly slater portrait


Quiksilver Celebrates Kelly Slater as He Transitions into His New Business Venture

  • "Quiksilver and world-champion surfer, Kelly Slater, have announced they will be discontinuing their 23-year partnership, effective April 1, 2014."
  • "Quiksilver Executive Chairman, Bob McKnight, first signed an 18 year-old Slater to the brand in 1990. 'Kelly has been a part of the Quiksilver family for over 20 years. It’s been an incredible journey watching him grow from a young surfer with great potential, to the 11-time World Champion he is today.' McKnight continues, 'We wish Kelly all the best as he enters this next phase of his career.'"

Additional commentary from Slater's Facebook page:

  • "As I contemplate the amazing opportunities I've had in life and the amount of good fortune I've encountered along the way, I’m excited to announce today that I’m embarking on a new journey. For years I've dreamt of developing a brand that combines my love of clean living, responsibility and style. The inspiration for this brand comes from the people and cultures I encounter in my constant global travels and this is my opportunity to build something the way I have always wanted to. So I am excited to tell you that I’ve chosen The Kering Group as a partner. They share my values and have the ability to support me in all of my endeavors."

Surfing Legend Kelly Slater Calls it Quits | $ZQK - chart2 4 1

Takeaway from Hedgeye’s Brian McGough:

No, this is not an April Fool's prank. Slater is history. He is to Quiksilver what Michael Jordan is to Nike. The difference is that Jordan has transcended his sport and has become a $1 billion-plus commercial brand that is bigger than the entire Quiksilver brand. Quiksilver tried to 'immortalize' Slater with lifestyle product, but it simply did not work. Makes sense for them to let him try his 'lifestyle experiment' with Kering. So the punchline is that we applaud Quiksilver's restraint – which so few brands have when it comes to these ego-driven deals.  We surveyed 1,000 Action Sports consumers about endorsements, and only 41% thought they were important. Of that, while most people likely knew Kelly Slater, only 17% actually knew that he was affiliated with Quiksilver. 

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Bubble, Overbought: SP500 Levels, Refreshed

Takeaway: You just saw 40 handles of upside from our 1842 oversold signal and now you have 30 handles of downside from our overbought signal.



In my last SP500 Levels note, “Bubble Up” (March 26th) I signaled that we’d like re-test the all-time-bubble-highs. Now that bubble is signaling immediate-term TRADE overbought.


While buying-the-damn-bubble #BTDB felt pretty darn good at the beginning of last March, Biotech and Social Media stocks were only down -15-45% from that prior capitulation high. I trust no one forgets that. Risk happens fast.


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


  1. Immediate-term TRADE overbought = 1885
  2. Immediate-term TRADE support = 1854
  3. Intermediate-term TREND support = 1823


In other words, you just saw 40 handles of straight upside from our 1842 oversold signal – and now you have 30 handles of downside from the overbought signal.


Don’t chase beta. Fade it.



Keith R. McCullough
Chief Executive Officer


Bubble, Overbought: SP500 Levels, Refreshed - SPX

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 80.43%
  • SHORT SIGNALS 78.34%


Stall Speed: Is Economic Caution Warranted?

Editor's note: This research note was originally published March 28, 2014 by Hedgeye Macro Analyst Christian B. Drake (@HedgeyeUSA). For more information on Hedgeye, please click here.


Stall Speed: Is Economic Caution Warranted? - CautionTape


  • Both incomes and spending decelerated in February while Core PCE inflation was static at a dovish, stall speed of just 1.1%. 
  • The income/spending deceleration was broad based with some negative weather drag, but the trend is one of deceleration and the primary pockets of spending strength in February are likely to be ephemeral.
  • High End Demand: It turns out that the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February.  Wealth effect spending, however, probably continues to ebb.
  • Healthcare Spending: At ~19% of Total household expenditures, spending on Medical Care matters, and Obamacare is distorting the numbers.  
  • Confidence: March marked a second month of mixed consumer confidence reports. Sentiment continues to meander alongside the dollars descent.  
  • FINALLY! Outside of some lagging housing data, all the material domestic, fundamental macro data for February has been reported….enjoy the oversold bounce and blithely enter the weekend knowing the vexatious ubiquity of weather caveat-ed macro releases has finally ended. 

Stall Speed: Is Economic Caution Warranted? - Income   Spending Table Feb


Stall Speed: Is Economic Caution Warranted? - Eco Summary Table 032814 

PERSONAL INCOME: 3 Months of Deceleration

Weather probably served as a negative distortion on reported, aggregate personal income in February, but with total Personal Income, Disposable Personal Income (DPI), DPI per capita and Private Sector Salary & Wage growth all decelerating for the 3rd consecutive month in February it feels hard to argue that weather is masking a strong underlying trend of acceleration. 


Stall Speed: Is Economic Caution Warranted? - Personal Income Feb


Private Sector Salaries and Wages decelerated by -60bps and -50bps on a YoY and 2Y basis, respectively, while aggregate government sourced wage income accelerated 30bps on a 1Y while holding flat sequentially on a 2Y basis. 


Alongside the spending friendly budget deal and ongoing positive state & local government employment growth, we continue to expect government salary and wage income to provide some modest upside to income growth in 2014. 


The savings rate ticked up to 4.3% from 4.2% but remains near historical trough levels.


The capacity for a further decline in savings to support incremental consumption growth remains very much constrained at current levels.   


Stall Speed: Is Economic Caution Warranted? - Salary   Wages


Stall Speed: Is Economic Caution Warranted? - Savings Rate 


CONSUMER SPENDING:  Healthcare & High End Discretionary supported February consumption expenditures.  The former is either transient or likely to be revised significantly and the latter isn’t likely to repeat last year’s performance.   


HIGH END DEMAND:  Last month we highlighted the deceleration in demand at the high end as implied by the slowdown in spending on luxury durables. 


As it turns out, however, the rich are still pretty rich and high ticket discretionary spending saw a moderate bounce in February (see our previous note for more on the latest income division dynamics - INFLECTIONS OR FALSE POSITIVES?). 


The read through here is mixed as the contribution to total durables growth from higher-end discretionary helped mask more broader weakness. 


Further, with stocks flat YTD, housing decelerating and the Fed beginning to reign in their explicit, asset re-flation (i.e. wealth effect) policy agenda, the probability for the top income quartiles to provide incremental demand growth (in similar magnitude to last year) seems to be diminishing.


Stall Speed: Is Economic Caution Warranted? - PCE Luxury


Stall Speed: Is Economic Caution Warranted? - Luxury Goods   Contribution



Spending on Healthcare Services has been the notable positive outlier over the last few month and the effect stems largely from the implementation of Obamacare.


The reported figures are very much an estimate and the preliminary data are likely to be revised significantly over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.   


With reported Hospital and Outpatient spending both accelerating materially, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes. 


Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~19% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth.    


To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend. 


Unfortunately, like the now ubiquitous weather asterisk, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact. 


Stall Speed: Is Economic Caution Warranted? - Healthcare PCE


CONSUMER CONFIDENCE: Across the primary survey's, March proved to be a second straight month of meandering for consumer confidence. 


The final University of Michigan Consumer Sentiment reading for March declined -1.6pts sequentially to 80.0 – the worst reading in 4 months. 


The conference board and Bloomberg Surveys, meanwhile, showed consumer confidence improving by 4pts and 1.6pts, respectively, in March.    


Notably, the relationship between the $USD and confidence remains reasonably strong. The dollar is currently in Bearish Formation (Broken Trade, Trend & Tail) and with growth slowing and commodity inflation accelerating the balance of risk for the currency remains to the downside, in our view.  


Stall Speed: Is Economic Caution Warranted? - USD vs Confidence


Stall Speed: Is Economic Caution Warranted? - Confidence Table 032814

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LEISURE LETTER (04/01/2014)




Wednesday, April 2

  • March ADP Employment report

Friday, April 4

  • March NFP report

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

Wednesday, April 9

  • SHO Investor Day

Thursday, April 10

  • HST Investor Day



SJM – (Macau Business Daily) SJM may increase leverage to fund its 2017 Lisboa Palace but the company is under no financial pressure, says SJM’s CEO Ambrose So. So said that they may have to vie for labor with other gaming operators like WYNN and MGM. MGM Cotai expected to open in 2016, requires at least 8,000 employees (same as SJM Cotai), while Wynn Palace needs “9,000 to 10,000 workers” when it opens by 2016.  “In these two or three years there will be numerous university graduates which can supplement the labor shortage,” Mr So said yesterday. “But we still have to see the human resources situation by then to decide any policy.”


TAKEAWAY:  We worry less about demand and more about labor shortages.


BYI – acquired the land-based distribution rights to a selection of social casino titles currently live on New Jersey-based developer High 5 Games’ Facebook apps.  Bally gains the rights to ten titles from the High 5 Casino and Asian-facing Shake the Sky Casino apps: Gypsy, Madame Monarch, Pasión y Fuego, Foxy Dynamite, Valkyrie Queen, Palace of Magic, Zen Panda, Night Jasmine, Silk & Steel and MISS Universe Crowning Moment.  The deal follows the companies agreeing to extend their supplier partnership in December last year following the first roll-out of H5G’s slot games repurposed as land-based games. Under the terms of the partnership H5G retains the exclusive online, social and mobile rights to the titles.

TAKEAWAY:  Setting the stage for national online gaming while trying to attract the new generation of younger gamblers who do not play slot machines.


CZR – the High Roller, the 550 feet tall observation deck wheel officially opened yesterday at 1 p.m.  The High Roller includes 28 cabins that can spaciously fit up to 40 people each.

TAKEAWAY:  While we expect the opening to draw immediate visitor attention, it remains to be seen if the attraction has sustainability. 


H – the Park Hyatt is scheduled to open July 20, 2014 in NYC and will feature 210 luxurious guestrooms, including 92 premier suites, all with floor-to-ceiling windows and nestled within the first 25 floors of the iconic, 90-story One57 skyscraper.  Nightly rates for a standard room start at $795 to $1,295. 

TAKEAWAY:  This property will likely become a go to property for NYC visitors and tourists due to its central location, newness, and up-scale amenities. 


MAR - $200MM Protea deal completed

TAKEAWAY:  MAR does not expect the acquisition to have a material impact on 2014 earnings


RCL – will send the Explorer of the Seas to Southampton, England in the summer of 2015 instead of the Adventure of the Seas as previously announced.  Prior to starting European service, Explorer will have a month-long drydock to be revitalized and receive features such as virtual balconies. RCL said, "The deployment of Explorer of the Seas to the UK is not associated with any issues with Adventure of the Seas. Stay tuned as the reason for Explorer of the Seas' deployment will become evident shortly."


INDUSTRY NEWS              

Macau March GGR – totaled HKD 34.42 billion (MOP 35.453 billion, USD 4.44 billion), up 13.14% YoY and down 6.72% MoM.  For the first quarter 2014, total GGR was HKD 99.222 billion (MOP 102.199 billion), up 19.83% YoY. 

TAKEAWAY:  Total March GGR was slightly better than our estimate.  For April, we forecast GGR, up 15% YoY


Gaming facilities are not a priority for Kinmen Macau Business

Establishing casinos on Taiwan’s Kinmen islands is not a priority.  Deputy mayor of Kinmen, Wu Yu Chin, said residents were worried that casinos would bring security problems.  The Kinmen group is close to the mainland and was one of the candidates Taipei considered as a gambling destination.  Kinmen officials have been in Macau seeking foreign investment.


China Graft & Corruption Crackdown –  1) Chinese authorities have seized assets worth at least 90 billion yuan (S$18.3 billion) from family members and associates of retired domestic security czar Zhou Yongkang, who is at the center of China's biggest corruption scandal in more than six decades.  2) More than 300 of Mr Zhou's relatives, political allies, proteges and staff have also been taken into custody or questioned in the past four months.   3) A former Zhou Yongkang aide Ji Wenlin had been removed from his post as a vice governor of the southern island province of Hainan.

TAKEAWAY:  Visible signs the Central Government won't allow officials to set outside of Central Government mandates and policy.


New York State Gaming Commission Facility Location Board – released application details for the three regions: Capital, Catskills and Southern Tier.  All applications are due by June 30th and must include a $1 million.  Additionally, the licensing fees will be: 

  • Capital Region: $50 million
  • Eastern Southern Tier: Broome, Chemung, Schuylor, Tioga or Tompkins Counties: $35 million; Wayne or Seneca Counties: $50 million; if a license is awarded in Wayne or Seneca Counties, the fee for the remaining counties in the region would be $20 million.
  • Catskills/Hudson Valley: Dutchess or Orange Counties: $70 million. If no license is awarded in Dutchess or Orange Counties, the licensing fee for the remaining five counties in the region (Columbia, Delaware, Greene, Sullivan and Ulster Counties) would be $50 million. If a license is awarded in Dutchess or Orange Counties, the fee for the remaining counties would be $35 million.

LEISURE LETTER (04/01/2014) - Chart 1   NY Gamning Regions

Source: New York State Gaming Commission


The Resort Gaming Facility Location Board will evaluate applications on the following scale and issue a finding on each:

  • 70% Economic activity and business development factors
  • 20% Local impact and siting factors
  • 10% Workforce enhancement factors

The timeline for the casino siting process:

  • June 30, Bids due
  • July-August, Gaming Facility Location Board reviews, evaluates submissions
  • Early fall, commission commences licensing review of applicants
  • Early fall, casino siting and operators formally announced

TAKEAWAY:  We expected the media and public relations machines to hit full speed as the battle of sound bites begins.  Expect commentary from current pari-mutuels Tioga Downs, Monticello Casino & Raceway, and Saratoga Raceway. 


New York State & Internet Poker – Senate Gaming Chairman John Bonacic introduced Senate Bill 6913, which would amend the current racing and pari-mutuel regulations, and allow 10 online poker licenses, each for 10 years and a $10 million licensing fee.  Internet poker would be taxed at 15%.   

TAKEAWAY:  If New York passes this legislation, we expect additional states to quickly follow.  SB 6913, however, disqualifies any company charged with accepting online wagering following the UIGEA in 2006.  


China March Official PMI was 50.3 versus 50.2 in February; however, new export orders index was 50.1 an improvement from 48.2 in February.  

TAKEAWAY:  In-line with Street expectations


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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