DRI: The Big Miss

Darden is due to report 4QF14 EPS tomorrow before the open and we’re confident that the news coming out of the quarter will be nothing short of a disaster.

 

With that in mind, we’d like to offer up some key thoughts:

  1. The 4QF14 consensus EPS estimate of $0.94 is $0.05 to $0.10 too high.
  2. The current FY15 consensus EPS estimate of $2.54 is $0.30 to $0.40 too high.
  3. The earnings implications are that the company will be unable to sustain its $2.20 dividend in FY15.
  4. There will be little, if any, legitimate visibility in regards to the attempted turnaround of the Olive Garden.
  5. Management will give guidance that will be too optimistic.

 

We suspect that very few analysts have updated the earnings power of the company to properly reflect the recent sale of Red Lobster to Golden Gate Capital for $2.1 billion ($1.6 billion net).  Additionally, we believe that analysts are currently too optimistic about current trends and what the future holds for FY15.  As we see it, changes to the Street’s models should include lower revenues, continued restaurant margin erosion, modest G&A reductions, lower interest expense and a lower share count from the use of proceeds.

 

As you can see in the charts below, the Street generally believes that Olive Garden is fixed and should see improved trends next quarter.  We’d note, however, that this has been the case for the last five years.  As such, it has become typical to hear something along the lines of “Don’t worry; the turnaround at Olive Garden is just one quarter away!”

 

We’ve repeatedly stated our view that current management headlines the bear case for DRI as they continue to destroy shareholder value.  Their actions during this past quarter simply reinforce our belief.  While there is a core group of shareholders that are working diligently to correct the issues, there is little that can be done between now and the annual meeting.

 

In the short-run, we have little reason to believe the stock will outperform.  Further out, we believe Darden’s cavalier attitude toward shareholders will result in wholesale changes at the company when the annual meeting comes around later this year.

 

DRI: The Big Miss - chart2

 

DRI: The Big Miss - chart1

 

Call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more