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The Hour Between Dog And Wolf | $DRI

Takeaway: The sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.

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Yesterday was a big day – DRI rose 3.5% on 2x the average daily volume.  As we’ve said before, the theme here is consistent: The stock rises on days change is in the air and falls when management publicly digs their heels in.

 

The title of this note derives from the French saying: “L’heure entre chien et loup.” It refers to the moments following sunset, when the sky darkens and vision becomes unclear, making it difficult to distinguish between dogs and wolves.

 

We’re using this expression to create a metaphor for the uncomfortable situation that is unfolding at Darden, following the news that Starboard Value has won shareholder consent to call a Special Meeting. With yesterday’s victory, the sun is beginning to set in Orlando and it’s becoming increasingly difficult for management to distinguish between dog and wolf.

 

From where we sit, there is enough light to see the animal in front of them is a dog. Unfortunately, management appears predisposed to a certain view. As a result, they see a wolf and, by extension, feel trapped. It didn’t have to be this way. The truth is, there is a way out of this situation that would leave all constituents feeling safe and shareholders feeling happy. For some reason, this has been so unclear to the powers that be in Orlando.

 

Part of the haze may be stemming from the notion that Starboard only got 55% of shareholders to consent. On the surface, this might appear like a slim margin of victory. However, the turnover since the record date, shares short and the retail component are all factors that suggest this is a convincing margin of victory. We hope Darden’s advisors will give the Board and management a straight story, so that they can see the situation more clearly. If they wait until nightfall, however, we suspect that dog could soon become a wolf.

 

This French saying also highlights the stark contrast between the “familiar and comfortable” and the “unknown and dangerous.” Ever since activists began pushing for change at Darden, management has retreated and found solace in the confines of Orlando, where they have lived a comfortable life for many years. Between the lifestyle they are fighting to protect and the considerable financial resources at their disposal, they have been unwilling to face the harsh reality of the situation. In its 18 years as a public company, Darden has never found itself in a similar situation. Knowing how to properly respond, therefore, can be a daunting task.

 

Under significant pressure, CEO Clarence Otis has been unwilling to hold himself accountable for his decisions. For example, Mr. Otis failed to stress test his plans to create shareholder value with critical Wall Street analysts, opting, instead, to conduct one-on-one meetings with shareholders. Alas, the moat he has built around his castle is not serving him well. As a result, the Board and management now find themselves in the center of a very uncomfortable situation in which they are losing control of the company.

 

Yesterday, Jeffrey C. Smith, Managing Member, Chief Executive Officer and Chief Investment Officer of Starboard Value LP, went on CNBC to discuss Darden’s proposed separation of Red Lobster. Reading between the lines, Mr. Smith is very clear about what needs to happen at Darden:

 

“There clearly have been operational issues and clearly there are strategic issues now and that all starts at the top. I mean, so as a shareholder, our power, our control is with the Board. Our power is, in theory, at some point to be able to nominate directors and potentially replace the Board if they’re not doing a great job in overseeing management and how the business is being run. The biggest decision for a board is in choosing the CEO and continuing to choose the CEO and I think there are some strategic issues here and operational issues. So, is Mr. Otis in a hot seat?  I think he is in a hot seat.”

 

The shareholders of Darden have spoken – it is time for significant change.

 

One wild card, and a current “unknown” to outsiders, is the financial performance of Darden to-date in 4QF14. With nearly two-thirds of the quarter in the books, management knows precisely how the period is shaping up. The leverage they might have with shareholders is to prove their recent operational initiatives are gaining traction. However, given the current data we are seeing on sales trends, we highly doubt there will be much good news to talk about when they report earnings. In fact, considering the lack of momentum in the business, we expect to hear disappointing guidance for FY15. Even after two disastrous years of -10% and approximately -25% EPS growth, it’s unlikely they will be able to hit the current consensus estimate of 12% EPS growth in FY15.

 

Change is in the air.

 

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Editor's Note: This note was originally sent to subscribers on April 23, 2014 at 8:16 a.m EST by Hedgeye Restaurants sector head Howard Penney. Follow Howard on Twitter @HedgeyeHWP.

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New Best Ideas: Short ATLS, APL (Report + Dial-In)

New Best Ideas: Short ATLS, APL (Report + Dial-In) - Atlas cartoon

 

Hedgeye Fair Values:

ATLS: $6.00/unit (~85% Downside)

APL: $16.00/unit (~50% Downside)

ARP: $12.50/unit (~40% Downside)

 

Link to Report: Hedgeye Best Idea: Short ATLS & APL

 

Conference Call TODAY (4/24/14) at 12:30pm to discuss the thesis and field questions.

 

Dial-In Info:

Code: 169921#

Send questions to .

 

 

Kevin Kaiser

Managing Director

 

 


INITIAL CLAIMS: THE POSITIVE STREAK CONTINUES

Takeaway: Looking past the Easter-driven seasonality, this morning marks the fifth week in a row of strong initial claims data

Below is the detailed breakdown of this morning's claims data from the Hedgeye Financials team led by Joshua Steiner. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 

 

Labor Continues to Improve

Easter week is notoriously choppy from a data standpoint so investors should take the single-week seasonally-adjusted initial claims data with a grain of salt. In fact, in the past decade, the average w/w change has been +20k, which is more or less in-line with the 25k increase seen this week.

 

Our preferred method remains looking at the rolling NSA claims on a y/y basis. On that measure, the level of newly unemployed Americans was lower by 11% year-over-year, which was slightly worse than the prior week's 12% decline, but still a very strong rate of y/y improvement.

 

Since the start of 2014, that's the second fastest rate of improvement we've seen, eclipsed only by the previous week's 12% figure.

 

The data in hand so far continues to bode well for the April NFP jobs report due out next Friday, May 2.

 

The Data

Prior to revision, initial jobless claims rose 25k to 329k from 304k WoW, as the prior week's number was revised up by 1k to 305k.

 

The headline (unrevised) number shows claims were higher by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 316.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.0%

 

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


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Are US Births Beginning a Multi-Year Rebound?

Takeaway: An analysis of the Current Population Survey is forecasting a rebound in births in the United States.

Are US Births Beginning a Multi-Year Rebound? - baby hospital watch this  007

 

Using the Current Population Survey (CPS), reported monthly by the US Census Bureau, we've derived a curve for US Births that closely approximates data reported by the US Census Bureau on a significant lag. 

 

The latest data for the CPS is for March 2014. The CPS analysis shows that births accelerated in Q4 2013, despite the tough year over year compare. This result was apparent in relevant company reports, and appears to have continued in Q1 2014 at a similar pace.

 

Are US Births Beginning a Multi-Year Rebound? - birth projection large

 

As it relates to HCA (one of the stocks we’re currently recommending in Investing Ideas), inpatient admissions should see a tailwind, given 25% of Hospital Industry admissions are maternity related.

 

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Editor's Note: This is an excerpt of a research note that was originally sent to subscribers on April 22, 2014 by Hedgeye Healthcare sector head Tom Tobin. Follow Tom on Twitter @HedgeyeHC.

SUBSCRIBE TO HEDGEYE.


INITIAL CLAIMS: THE POSITIVE STREAK CONTINUES

Takeaway: Looking past the Easter-driven seasonality, this morning marks the fifth week in a row of strong data initial claims data.

Labor Continues to Improve

Easter week is notoriously choppy from a data standpoint so investors should take the single-week seasonally-adjusted initial claims data with a grain of salt. In fact, in the past decade, the average w/w change has been +20k, which is more or less in-line with the 25k increase seen this week. Our preferred method remains looking at the rolling NSA claims on a y/y basis. On that measure, the level of newly unemployed Americans was lower by 11% year-over-year, which was slightly worse than the prior week's 12% decline, but still a very strong rate of y/y improvement. Since the start of 2014, that's the second fastest rate of improvement we've seen, eclipsed only by the previous week's 12% figure. The data in hand so far continues to bode well for the April NFP jobs report due out next Friday, May 2.

 

The Data

Prior to revision, initial jobless claims rose 25k to 329k from 304k WoW, as the prior week's number was revised up by 1k to 305k.

 

The headline (unrevised) number shows claims were higher by 24k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 4.75k WoW to 316.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.0% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -12.0%

 

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Yield Spreads

The 2-10 spread was unchanged at 226 bps. 2Q14TD, the 2-10 spread is averaging 230 bps, which is lower by -9 bps relative to 1Q14.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 



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