Monday Mashup: Darden Sells Red Lobster

Investment Ideas

The table below lists our current Investment Ideas as well as our Watch List – a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail on any material changes.


Monday Mashup: Darden Sells Red Lobster - 1


BLMN: We removed Bloomin’ Brands from the Investment Ideas list as a short on Wednesday, after our bearish thesis largely played out.  We’ve relegated it to the Watch List and will look for another entry on the short side at a better price.  FY15 estimates are still too aggressive.

Recent Notes

05/12/14  Monday Mashup: BOBE Replay, JACK Reports

05/14/14  BLMN: Closing Best Idea Short

05/15/14  BOBE: Asset-Light Is Right

05/16/14  DRI: Twice-Cooked, Half-Baked

Events This Week

05/20/14  RRGB Earnings Call 10am EST

05/20/14  COSI Annual General Meeting

05/22/14  FRSH Earnings Call 5pm EST

05/22/14  MCD Annual General Meeting 9am EST

05/22/14  DENN Annual General Meeting 9am EST

05/22/14  IRG Annual General Meeting 10am EST

05/22/14  TXRH Annual General Meeting

05/22/14  PLKI Annual General Meeting

05/22/14  RRGB Annual General Meeting

Chart of the Day

Following last week’s news that the management and board of Darden decided to push forward with the sale of Red Lobster despite shareholder requests to hold a Special Meeting to discuss the matter, we thought it’d be interesting to pull up the company’s ROIIC (return on incremental invested capital) chart.  In our view, ROIIC is one of the most important metrics for restaurant companies and tends to tell the true, underlying capital allocation story.  Returns have been deteriorating rampantly since early 2011, signaling to us a material case of mismanagement.


Monday Mashup: Darden Sells Red Lobster - chart2

Recent News Flow

Monday, May 12th

  • RRGB announced plans to open its newest restaurant in the Phoenix Metropolitan area on Monday, May 26.
  • WEN is celebrating National Salad Month by partnering with actress Molly Sims to host its third #NewSaladCollection contest.

Tuesday, May 13th

  • MCD UBS upgraded its PT to $120, citing comp improvement in the U.S.
  • KKD announced current President and CEO James Morgan will become Executive Chairman on June 1st.  At this time, former PZZA President and COO, Tony Thompson, will become the new President and CEO of Krispy Kreme Doughnuts.
  • PLKI appointed VP of Finance Tony Woodward as Interim CFO, effective May 23rd, as they continue their search for a permanent replacement for the departing Melville Hope III.

Wednesday, May 14th

  • DRI Starboard Value sent a letter to Darden’s board demanding they call a Special Meeting in a timely fashion.  In the letter, Starboard highlighted how the company has been misleading shareholders.
  • BWLD held the grand opening of its first PizzaRev franchise in Hopkins, MN, making it the first PizzaRev restaurant outside of the California market.
  • JACK initiated a $0.20 quarterly cash dividend.

Thursday, May 15th

  • CMG launched its “Cultivating Thought” author series, a new program featuring original essays by renowned authors, comedians and thought leaders designed to help tell the company’s unique story.  The stories are told on both Chipotle cups and bags and features the work of Michael Lewis, Sarah Silverman and others.
  • PZZA After losing President and COO Tony Thompson to KKD, Papa John’s promoted Senior VP of Global Operations, Steve Ritchie, to COO.  Ritchie has been with Papa John’s in various roles for the past 18 years.

Friday, May 16th

  • DRI In a move that shunned shareholders, Darden announced the sale of Red Lobster to Golden Gate Capital for $2.1 billion.  Darden will receive after tax proceeds of $1.6 billion from the sale, of which approximately $1 billion will be used to retire outstanding debt with the remainder being used to fuel a new share repurchase program.  If you recall, the overwhelming majority of voting shareholders requested a Special Meeting to discuss a potential Red Lobster sale.  Instead, at a $1.6 billion after tax profit, the board decided to push forward with a sale and give away the Red Lobster business for free. Darden expects the sale to close in early 1QF15.
  • WEN announced a $0.05 quarterly cash dividend.
  • CMG Word came out from Credit Suisse that Chipotle is already taking mid-single digit price increases in order to offset rising food costs.  The firm notes these actions have been met with little resistance and reiterated its $640 PT.

U.S. Macro Consumption

The XLY (0.1%) slightly underperformed the SPX (0.0%) last week.  Both casual dining and quick service stocks, in aggregate, underperformed the broader XLY index.  


Monday Mashup: Darden Sells Red Lobster - 3


Monday Mashup: Darden Sells Red Lobster - 4


The Hedgeye U.S. Consumption Model reverted back to bearish formation, flashing red on 7 out of 12 metrics.


Monday Mashup: Darden Sells Red Lobster - 5

XLY Quantitative Setup

From a quantitative perspective, the sector remains bearish on an intermediate-term TREND duration.


Monday Mashup: Darden Sells Red Lobster - 6

Casual Dining Restaurants

Monday Mashup: Darden Sells Red Lobster - 7


Monday Mashup: Darden Sells Red Lobster - 8

Quick Service Restaurants

Monday Mashup: Darden Sells Red Lobster - 9


Monday Mashup: Darden Sells Red Lobster - 10


Howard Penney

Managing Director


Fred Masotta



European Banking Monitor: Credit Risk Widens Substantially

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




European Financial CDS - Swaps were notably widener in Europe last week but remain modestly tighter month-over-month.  Greek banks, which have seen their swaps tighten steadily for months now widened sharply. 


European Banking Monitor: Credit Risk Widens Substantially - chart 1 european financials CDS


Sovereign CDS – Sovereign swaps widened last week. Italian sovereign swaps widened by 11% (11 bps to 113) and Portuguese sovereign swaps widened by 18% (27 bps to 180).


European Banking Monitor: Credit Risk Widens Substantially - chart 2 Sovereign CDS


European Banking Monitor: Credit Risk Widens Substantially - chart 3 Sovereign CDS


European Banking Monitor: Credit Risk Widens Substantially - chart 4 sovereign CDS


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 19 bps.


European Banking Monitor: Credit Risk Widens Substantially - chart 5 Euribor OIS Spread



Matthew Hedrick



Ben Ryan




Just Charts: Slow Growth Yield Chasing Remains The Rage

The table below lists our current investment ideas as well as a list of potential ideas we are in the process of evaluating (watch list).  We intend to update this table regularly and will provide detail on any material changes.


Just Charts: Slow Growth Yield Chasing Remains The Rage - 1


Consumer Staples mildly underperformed the broader market last week, falling -0.52% versus the S&P500 at -0.03%. XLP is up 3.0% year-to-date vs the SPX at 1.6%.


Earnings Calls (in EST):

Monday (5/19):  CPB (8:30am)

Wednesday (5/21):  HRL (9am)


BMO Capital Markets Farm To Market Conference (in EST):

Wednesday (5/21):  TSN (8am); SAFM (9am); HAIN (11am); SMG (1:30pm); HRL (4pm)


For the last 2+ months, XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.


Just Charts: Slow Growth Yield Chasing Remains The Rage - 2


The Hedgeye U.S. Consumption Model has shown steady improvement over the past three weeks, with 5 of the 12 metrics flashing green.


Just Charts: Slow Growth Yield Chasing Remains The Rage - 3


Despite the bullish quantitative set-up for the sector, we continue to believe that the group is facing numerous headwinds, including:


  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating, and Q2 2014 theme of #ConsumerSlowing
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.6x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (recently rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, and fell to 34.9 versus 37.1 in the prior week

Just Charts: Slow Growth Yield Chasing Remains The Rage - 4


Just Charts: Slow Growth Yield Chasing Remains The Rage - 5


Just Charts: Slow Growth Yield Chasing Remains The Rage - 6


Top 5 Week-over-Week Divergent Performances:

Positive Divergence:  DF 5.8%; MNST 5.3%; STZ 4.6%; DEO 4.5%; BNNY 4.0%

Negative Divergence:  RDEN -26.8%; PG -2.5%; POST -2.2%; LNCE -1.9%; ENR -1.8%



Last Week’s Research Notes


Quantitative Setup

In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).


BUD – remains bullish TREND as it carried most of the slow-growth-big-cap-low-beta style factors the market is chasing right now; TREND support = $106.65


Just Charts: Slow Growth Yield Chasing Remains The Rage - 7


DEO  - finally joins the slow-growth-low-beta party, breaking out above TREND line resistance of $125.93


Just Charts: Slow Growth Yield Chasing Remains The Rage - 8


KO – same as BUD – the market’s style factor appetite for an equity with these characteristics changed in April; TREND bullish, $34.79 support


Just Charts: Slow Growth Yield Chasing Remains The Rage - 9


PEP – looks just like KO right now; bullish intermediate-term TREND with $83.71 TREND support


Just Charts: Slow Growth Yield Chasing Remains The Rage - 10


GIS  - still one of the best looking names on this list; TREND support = $51.44


Just Charts: Slow Growth Yield Chasing Remains The Rage - 11


MDLZ – big TREND breakout on big volume in the early part of May #confirmed; TREND support building a big base at $35.59


Just Charts: Slow Growth Yield Chasing Remains The Rage - 12


KMB – if I had to buy one name on this sector on the open this week, it would probably be KMB; TREND support = $108.65


Just Charts: Slow Growth Yield Chasing Remains The Rage - 13


PG – doesn’t look as solid as BUD, KO, and PEP (as it broke its immediate-term TRADE line last week); TREND support of $80.0


Just Charts: Slow Growth Yield Chasing Remains The Rage - 14


MO  - slow-growth-yield-chasing remains the rage; bullish intermediate-term TREND breakout from March intact, support = $37.92


Just Charts: Slow Growth Yield Chasing Remains The Rage - 15


PM – no change as the bearish to bullish TREND reversal of the last 6 weeks is confirmed; TREND support = $83.91


Just Charts: Slow Growth Yield Chasing Remains The Rage - 16


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.


This past week's numbers look unreliable.



The numbers are in and last week generated HK$6.2 billion in table revenues for the Macau casinos, as reported.  HK$6.2 billion is one of the “placeholder” numbers we’ve written about extensively and cannot be relied upon (see our note, "WE'VE BEEN PLACEHOLDERED!" on 4/29/2014).  In fact, the 3rd week of May last year also generated exactly HK$6.2 billion of table revenue.  Moreover, month to date table revenues totaled HK$18.6 billion - divided by the 3 weeks equates to, you guessed it, HK$6.2 billion per week.  Come on, can we be at least a little creative? 


We expect a positive catch up in next week’s data or the subsequent week that could push YoY growth close to our 20% estimate.  In fact, our sources on the ground are indicating they are pleased with both VIP and Mass volumes and hold percentage seems to be tracking close to normal.  The UnionPay issue, junket incidents, and China Macro do not appear to be having much of a negative impact on the market.




 For market share, Galaxy is the only company tracking meaningfully above its recent trend, at the expense of SJM.



Retail Callouts (5/19): TGT, Adi, WMT

Takeaway: TGT CMO responds to scathing employee letter. Adi CEO talks succession plan. WMT won't oppose minimum wage hike.


Retail Callouts (5/19): TGT, Adi, WMT - ideas




MONDAY (5/19)

  • URBN - Earnings Call, 5:00pm


TUESDAY (5/20)

  • DKS - Earnings Call, 10:00am
  • TJX - Earnings Call, 11:00am



  • TIF - Earnings Call, 8:30am
  • PETM - Earnings Call, 10:00am
  • TGT - Earnings Call, 10:30am
  • AEO - Earnings Call, 11:00am
  • WSM - Earnings Call, 5:00pm



  • BKE - Earnings Call, 10:00am
  • BONT - Earnings Call, 10:0am
  • ARO - Earnings Call, 4:15pm
  • ROST - Earnings Call, 4:15pm
  • GPS - Earnings Call, 5:00pm


FRIDAY (5/23)

  • FL - Earnings Call, 9:00am




TGT - The Truth Hurts



Target CMO, Jeff Jones, in response to the article posted by an anonymous employee on gawker: (


  • "You’d think that these two incidents alone [Data Breach & CEO resignation] would create enough pain to last a brand a lifetime but one of the most challenging things that has happened, in my opinion, have been reports, some attributed to unnamed team members, that paint a picture of a culture that is in crisis. When a recent post on a well-known blog called me out by name, it only felt right that I should respond."
  • "While we would have preferred to have a conversation like this with the team member directly, speaking openly and honestly, and challenging norms is exactly what we need to be doing today and every day going forward."


Takeaway: Normally we wouldn't characterize the opinion of one disgruntled employee as indicative of the corporate culture, but the fact that TGT's CMO, Jeff Jones, personally addressed the anonymous letter in public is telling. Jones was actually the only person called out as being a positive influence in the executive ranks. He's speaking up on behalf of the executive officers of Target, most of whom are afraid for their jobs.  They should be.


ADDYY - Adidas CEO Herbert Hainer to prepare succession in coming years: Report



  • "The long-serving chief executive of Germany's Adidas said preparing the sportswear giant for a change at the top when his contract ends in 2017 will be among his biggest priorities, Sueddeutsche Zeitung reported on Saturday."
  • "I will not stay forever...One of my key tasks in the next three years will be to initiate the change at the top and to escort it." 


Takeaway: Not a big shock given that Hainer has started to divert his attention towards other interests including the role of President and Business Chairman of the Bayern Munich football club. That, and the fact that he's been unable to consistently grow the core brand in key markets on a sustainable basis without relying on acquisitions.


WMT - Wal-Mart Says It Won't Oppose Increase in Minimum Wage -- Update



  • "Wal-Mart Stores Inc. said it wouldn't oppose an increase in the federal minimum wage, its most explicit comment yet on the controversial debate to move past the $7.25-an-hour minimum."
  • "'We are not opposed to minimum wage increase, unless its directed exclusively at us,' said Wal-Mart U.S. President Bill Simon, referring to an attempt by the District of Columbia city council to require big retailers to pay starting wages that are higher than Washington's minimum wage."
  • "Wal-Mart spokeswoman Brooke Buchanan said the company's official position hasn't changed and it remains neutral on whether or not the minimum wage should be increased. 'Just because we don't oppose it, doesn't mean we support it,' she said."


Takeaway: WMT supporting a hike in the minimum wage law is like AMZN supporting a federally imposed online sales tax. Intuitively it doesn't make sense, but it does level the playing field. WMT and AMZN are big enough to handle the fallout from these respective changes in policy, but its competition would be much harder pressed because of the disparity in scale.




comScore Reports $56.1 Billion in Q1 2014 Desktop-Based U.S. Retail E-Commerce Spending, Up 12 Percent vs. Year Ago



  • "comScore, released its estimates of Q1 2014 U.S. digital commerce sales. Q1 2014 saw desktop e-commerce spending rise 12 percent year-over-year to $56.1 billion, marking the eighteenth consecutive quarter of positive year-over-year growth and fourteenth consecutive quarter of double-digit growth. M-commerce spending on smartphones and tablets added $7.3 billion for the quarter, up 23 percent vs. year ago, for a digital commerce spending total of $63.4 billion in the first quarter."
  • Other highlights from Q1 2014 include:
    • The top-performing online product categories were: Apparel & Accessories, Consumer Packaged Goods, Sport & Fitness, Digital Content & Subscriptions, and Home & Garden. Each category grew at least 13 percent vs. year ago.
    • Desktop E-commerce accounted for 11.7 percent of consumers’ discretionary spending, the highest first quarter share on record.
    • Of the additional $7.3 billion in mobile commerce (m-commerce), purchasing using smartphones accounted for 62 percent vs. 38 percent from tablets.


Retail Callouts (5/19): TGT, Adi, WMT - chart2 5 19


What's Selling: Women's



STELLA MAE, Burlington, Vt.

  • Frye Sabrina boot
  • Clarks Caslynn Cheryl wedge sandal
  • Victoria Classico sneaker

Spring trend: “We have a big assortment, so really there isn’t one trend that people will come in to find. For summer, we’ve been selling a lot of sneakers and wedges — both high and low,” said store manager Laura Cunningham. 



  • Naot Kirei Mary Jane shoe
  • Mephisto Helen sandal
  • Bernie Mev Comfi slip-on

Spring trend: “We’re custom-oriented, so most of our clients are more focused on fit and foot problems, but when we get into spring and summer, we really sell Naot more than anything,” said manager Matt Ivan.


SCARPA, Charlottesville, Va.

  • Coclico Sela sandal
  • Attilio Giusti Leombruni oxfords
  • Lola Cruz Toe-Ring Sandal

Spring trend: “Clients are buying more Birkenstocks than they were a few years back, and more people are picking up lace-up oxfords than in years past,” said merchandising and store manager Susie White.



  • Pura Lopez wedges
  • Rag & Bone Wyatt bootie
  • Dolce Vita Nona heel

Spring trend: “Funky shoes that aren’t so matchy-match are very popular,” said store associate Chad Chappell. “And things that are versatile sell well.”




SCC, SHLD - Sears Canada Announces Sale of its Minority Interest in Trois-Rivières Joint Arrangement



  • "Sears Canada Inc. announced today that it has entered into an agreement for the sale of its 15% minority ownership interest in the Centre commercial Les Rivières shopping centre in Trois-Rivières, Quebec, a joint arrangement the Company holds with affiliates of Ivanhoé Cambridge, for pre-tax consideration of $33.5 million. Ivanhoé Cambridge is purchasing the 15% interest that it does not already own from Sears. The transaction is subject to customary closing conditions and is scheduled to close on June 2, 2014."
  • "Sears will continue to operate its department store in the shopping centre, and Ivanhoé Cambridge will continue to manage the property."


BRBY - Burberry Renews Part of Japanese License With Sanyo



  • "...Burberry has inked a new license with Sanyo Shokai Ltd. for its Blue and Black label collections."
  • "As reported, Burberry plans to take its Japanese business in-house next year when its current license with Sanyo expires. The move is aimed at bringing the Japanese offer upmarket and in line with Burberry’s worldwide distribution."
  • "On Monday, Burberry and Sanyo announced a new, three-year agreement that sees the British brand licensing its sporty, premium Black and Blue lines, which are both aimed at a younger audience, to Sanyo. Those lines will no longer carry the Burberry name, but will continue to be owned by the British brand."


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