Upon further review of Darden’s disastrous 4Q earnings release and outlook for FY15, we have updated some of our thoughts on the company’s vision for the future.  To be clear, following the divestiture of Red Lobster, we believe the company will struggle to pay its current dividend in FY16 without levering up.


For the sake of shareholders, Starboard must get control of the Board on September 30th.  Without a change of this magnitude, shareholders can expect more of the same: dismal returns, value destructive initiatives, and a complete disregard for shareholder concerns.


We’ve attached our commentary in a 12 page slide deck below.




Call with questions.


Howard Penney

Managing Director


Fred Masotta


Just Charts – Grinding Higher


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 – Grinding Higher - 1



6/25/14 GIS Earning Call 8:30am EST

6/25/14 TAP Analyst Meeting

6/26/14 PMI Investor Day 1

6/26/14 MKC Earnings Call 8:00am EST

6/26/14 CAG Earnings Call 9:30am EST

6/27/14 PMI Investor Day 2


XLP remains bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up.

Just Charts – Grinding Higher - 1. xlp


The Hedgeye U.S. Consumption Model has shown steady improvement over the past month, with 5 of the 12 U.S. Economic Indicators flashing green.

Just Charts – Grinding Higher - 1. consumption indi


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 20.0x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index (rescaled for cosmetic and not component reasons) has not seen any real improvement over the past 6 months, but rose to 37.1 versus 35.5 in the prior week

Just Charts – Grinding Higher - 1. pe

Just Charts – Grinding Higher - 1.consumer comf

Just Charts – Grinding Higher - 2. us personal incfome





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).


Just Charts – Grinding Higher - a. bud

Just Charts – Grinding Higher - b. deo

Just Charts – Grinding Higher - c. ko

Just Charts – Grinding Higher - d. pep

Just Charts – Grinding Higher - e. gis

Just Charts – Grinding Higher - f. mdlz

Just Charts – Grinding Higher - g. kmb

Just Charts – Grinding Higher - h. pg

Just Charts – Grinding Higher - i mo

Just Charts – Grinding Higher - j. pm


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Takeaway: Top-down signals and bottom-up fundamentals support chasing Argentine equities (ARGT) to new highs.

On JUN 18 the US Court of Appeals for the Second Circuit lifted the stay on Judge Thomas Griesa’s (NY-Southern District) previous ruling after Argentina was denied an opportunity to have its case against bond restructuring holdout NML Capital heard by the Supreme Court two days prior.


This effectively forces Argentina to make good on $1.5B of overdue credit on JUN 30 (or be forced to via seizures of int’l assets) – the same day it owes an additional $900M to bondholders that took place in the country’s 2005 and 2010 restructurings of 92% of the country’s 2001 $95B sovereign default at 29 cents on the dollar. Moreover, the ruling prevents Argentina from prioritizing payments on restructured bonds over those of the holdout paper.


Argentine policymakers rightfully fear the ruling opens the country up to an additional ~$15B of likely claims by other holdout creditors – effectively putting more than half of the country’s $28.8B in FX reserves at risk. It’s worth noting, that Argentina uses FX reserves as it primary source of USD liquidity.




One key issue to monitor over the next week is that a clause in the aforementioned restructuring contracts prevents other bondholders from receiving better deals in subsequent negations – an option Argentine leaders have signaled they are likely to pursue.


This intention was stated less than a week after Argentine financial markets were roiled by Argentine President Cristina Fernandez de Kirchner and Economy Minster Axel Kicillof’s aggressive remarks following the decision to lift the stay; they referred to the decision as “extortion” and said they would attempt to transfer their restructured foreign law bonds to local legislation in order to skirt the ruling.


Specifically, the Buenos Aires Stock Exchange’s benchmark Merval Index dropped -10.9% and -4.9% on JUN 16 and JUN 19, respectively. The Argentine peso declined -6% the black market to 12.40 per USD on JUN 19, its first day back “trading” since JUN 13. Fast forward to today, the Merval Index is up +10.4% since last Monday (JUN 16) on what appears to be a change of heart among the Argentine brass with respect to the ruling and threats of technical default.




There’s follow-through in the bond market as well; the country’s 2021 notes have rallied 9.63 cents on the dollar from their JUN 16 low to 97.27. Argentina’s 5Y CDS have tightened -1190bps from their JUN 17 wides to 1437bps. The market likes what optically appears to be a shift, on the margin, in the direction of less-crazy policy out of the Fernandez regime. Her decision to eventually award Spain’s Respol $5.1B after their 2012 expropriation of YPF and her decision to settle $9.7B worth of obligations with the Paris Club in late-MAY is supportive of this view.



Source: Bloomberg

Perhaps the “Fernandez discount” is on the brink of being sustainably eroded. If that is the case, Argentina is a country that could stand to see increased international interest in its financial markets on the political change catalyst; in fact, Argentina is not unlike India or Brazil in this regard.


In addition to this, our TACRM system is giving us two thumbs up on the ARGT etf here. From a quantitative perspective, the index fund is signaling “buy” on an idiosyncratic basis and, from a top-down perspective, both EM Equities and Commodities remain “buys” at the primary asset class level. The latter is supportive of marginal improvement in Argentina’s creditworthiness due to likely improvement in the current account balance (commodities account for ~65% of Argentine exports).








We don’t think it’s prudent to build a materially sized position in Argentine stocks; nor do we think it’s a long-term holding without further color on the holdout negotiations or a continued willingness for the Fernandez government to be less crazy. Moreover, the country’s debt ladder would seem to suggest that it’s far from out of the woods; it owes $10.3B  to international creditors in 2015, $12.7B in 2017 and $12.1B in 2018.



Source: Bloomberg


Time will tell. For now, happy squirrel hunting!




Darius Dale

Associate: Macro Team


***To the extent you’d like to learn more about TACRM and how we apply its consistent and robust quantitative signals to our decision-making process, please review the following white paper, which can be accessed via the following link: In short, TACRM systematically distills actionable investment color from the global financial marketplace in a manner that is consistent with quantitative rigor that investors have come to expect from Hedgeye.***

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LULU - Flash Call Wednesday 6/25 11am ET

Takeaway: We'll be hosting a flash call to discuss why we turned positive and added LULU to our Best Ideas List - tomorrow, June 25th, at 11am ET.

Please join us for a Flash Call on Lululemon (LULU) tomorrow, June 25th, at 11am ET. The purpose of the call is to review why we turned positive and added LULU to our Best Ideas list as a Long following the company’s latest disappointing quarter.


Simply put, our view is that things are so bad, that it’s good – and the subsequent activism by Chip Wilson supports that case.  Don’t get us wrong, Wilson is as much a liability now as he ever has been. But, we think that the path he’s marching down leads this company, and the stock, down an array of very defined outcomes - most of which are positive for LULU shareholders.  Our math suggests at least 3-to-1 upside/downside.


We’ll be exploring the following…

  1. A key focus for us is the decision tree facing this company based on Wilson’s effort to regain control of the Board. If he wins, certain things will happen. If he loses, there’s a completely different set of outcomes. We look at all outcomes that have a remote chance of happening and look at likely ensuing stock price.
  2. What obstacles does Wilson face in going activist on the company that he created? There are many. We’ve done the deep dive on the Board history and relationships.
  3. We’ll analyze the governance factors surrounding anyone who wants to influence this Board.
  4. What factors could lead to a take-out? Who could absorb a deal this big, and more importantly, who wants to?
  5. What’s the worst case scenario, and what would need to happen for us to back off of our thesis?
  6. Yes, there’s this thing called Selling Yoga Apparel. That matters. We’ll outline what fix we think the company needs in order to jump start its financial model.  



Toll Free Number:

Direct Dial Number:

Conference Code: 619868#

Materials: CLICK HERE


Cartoon of the Day: Kicked Consumers

Takeaway: U.S. consumers are experiencing some significant headwinds.

Cartoon of the Day: Kicked Consumers - consumer cartoon 06.24.2014


In an effort to evaluate performance, we compare how the quarter measured up to previous management commentary and guidance


CCL F2Q 2014 REPORT CARD - ccl1 


CCL F2Q 2014 REPORT CARD - ccl2



  • MIXED:  Every quarter, CCL manages to mess something up.  This time, management is blaming lower forward occupancy in the Caribbean. However, we are encouraged by the pricing environment we're seeing out of the Caribbean (even if it is uneven among their brands) and if pricing is sustained, this will bode well for 2015 performance in that region, in the face of declining supply.  While the hold price and sacrifice occupancy strategy may prove risky for CCL for another quarter, the pieces are set for CCL, at least, to meet their internal expectations for the year.  While we were neutral heading into today's print, we continue to believe CCL has to overcome the lowest bar among the 3 big operators this year; CCL should not set it any lower. 



  • MIXED:  Pricing is better at the expense of lower occupancy
    • Cautiously optimistic pricing will continue to firm and improve. 
    • On a number of voyages, willing to give up a couple of points of occupancy to hold price


  • WORSE:  Since March, fleetwide booking volumes for the next three quarters are running slightly behind, due to North America bookings. Mgmt expects the booking curve to continue to lengthen.
    • Fleet-wide booking values during this year's wave season have been running almost 20% ahead of the prior year, significantly outpacing capacity, albeit at lower prices.
    • Cumulative bookings for the next three quarters were ahead of the prior year as overall booking curve has started to lengthen.
    • Currently still toward the lower end of historical booking curve.


  • SAME:  Costa continues to improve its performance in F2Q.  Spain was one region of particular strength.
    • Costa achieved strong booking volumes during wave season, and in fact, we were almost up 50% year-over-year.  We've seen a continued improvement in perception with an almost doubling of trust and confidence in the core Italian market. 
    • The European economy is still choppy, but it's obviously strengthened. And we do see accelerated progress in the Costa brand


  • WORSE:  NA yields will be slightly negative (down from slightly positive) with the Caribbean behind on occupancy.
    • Our North American brands have caught up on occupancy compared to prior year
    • Seasonal European program for NA brands is strong; well ahead on both price and occupancy.


  • BETTER:  nicely ahead on both price and occupancy
    • Behind on price but well ahead on occupancy, which bodes very well for pricing on the remaining inventory.


  • BETTER:   Significantly ahead on occupancy with flat pricing. 
  • PREVIOUSLY:   Year-round European program, which represents 70% of the EAA brands capacity for the remainder of the year, is behind on price but well ahead on occupancy.  Recent booking volumes have been substantially ahead of last year, which again bodes well for pricing on the remaining inventory.


  • SAME:  The weak 3Q guidance was partially attributed to Japan  (Princess brand)
  • PREVIOUSLY: 3Q will be impacted to some degree by Japan


  • BETTER:  Lowered FY NCC ex fuel guidance to 'flat to slightly up'.  Mgmt sees opportunities for cost cuts in its air program for 2015.
    • Increased our investment in advertising and expect to spend over $600 million in 2014.
    • Crew travel and ports are two examples of large areas where CCL is conducting deeper dives.  CCL is still at early stage in sizing the [cost] opportunities in these and other categories. 

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