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DRI: Expectations for a Recovery Are Premature

We remain very cautious on DRI shares and believe expectations of a 2H15 recovery are not grounded in reality.  The bottom line is that the current consensus FY15 EPS estimate of $2.28 is about $0.28 too high.


As it stands, Darden’s management team is being asked to manage in an extremely difficult environment.  Interim CEO Gene Lee is trying to fix the company, while simultaneously interviewing for the full-time CEO position.  This not only poses inherent conflicts in the internal discussion of current trends, but it also strips him of the authority needed to make pursue value enhancing initiatives.


While most of the street is gloating about Olive Garden’s results this quarter, we have a very different point of view.  In fact, we’d argue that the chain had a disastrous quarter.  Though the sales trends appear to be improving, traffic and average check declined 100 bps and 30 bps, respectively, during the quarter.  This is a worrisome combination for any restaurant company and the results showed in Darden’s P&L.  Despite reporting strong comp growth and achieving, we assume, notable flow through at the majority of its other brands, consolidated restaurant margins declined 60 bps to 18.6%. 


You need not look past the press release to understand that Olive Garden had a weak quarter.


The 1Q15 press release was very specific about the Olive Garden recovery:

"We are pleased with the progress we are achieving across our brands, particularly at Olive Garden," said Gene Lee, President and Chief Operating Officer of Darden.  "The Olive Garden Brand Renaissance is well underway, and the improvements we are seeing in guest satisfaction and traffic trends reinforce our confidence in Olive Garden's potential."


The 2Q15 press release actually omitted comments about the Olive Garden recovery:

"Our brands performed well during the second quarter," said Interim CEO Gene Lee.  "We have been working diligently to execute our strategy, including getting back to basics while delivering the best possible guest experience.  It is starting to show in both improved revenue and profitability.  While it's still early, we believe our renewed focus on operating fundamentals, coupled with our more streamlined support structure, will help us continue to grow and capture market share."


The most damning piece of evidence suggesting the lack of an Olive Garden recovery is the unexpected halt of the remodel program.  While we agree this needed to happen, it was a critical component of the once highly-esteemed Brand Renaissance plan, which appears to be fizzling away. 


Street Suggests a Turnaround, OG Metrics Suggest Otherwise

  • Same-store sales +0.5%
  • Traffic -1%
  • Average check -0.3%
  • Consolidated restaurant margins declined 60 bps year-over-year to 18.6%
  • The remodel program has been put on delay due to insufficient returns


Given the operational short fall at Olive Garden, management consistently referred to opportunities with its real estate portfolio as well as the potential spinoff of other non-core assets.  While these things are nice to hear, they aren’t what’d yield the most shareholder value at Darden (fixing Olive Garden).  Importantly, none of the above will occur prior to getting a new CEO and CFO.


It’s been two months since Starboard took control and the lack of updates or disclosure around the CEO search has been discouraging; in fact, we haven’t seen or heard anything that suggests they are close to naming one.  We find this surprising and believe it may have been a major strategic error on Starboard’s end not to have one in place at the time of its takeover. 


The clock is ticking and it is getting more expensive to fix the company with each passing day.


The Good in 2QF15

  • Top line and bottom line beat of 76 bps and 238 bps, respectively.
  • Positive same-store sales trends across the portfolio (excl. BB): Olive Garden +0.5%, LongHorn +2.6%, SRG +3.2% (The Capital Grille +5.0%, Eddie V’s +4.9%, Yard House +3.7%, Seasons 52 +1.2%. Bahama Breeze -0.6%).
  • Guided to +1-2% system-wide same-store sales growth in FY15 versus the consensus estimate of +1%.
  • Tightened the low-end of its FY15 EPS guidance range to $2.25-2.30 versus $2.22-2.30 prior.


The Bad in 2QF15

  • FY15 will be a transition year, and nothing more.
  • There has been no mention around the timing of naming a new CEO and CFO.
  • Still lacking a strategic long-term vision.
  • There is no sign of a Brand Renaissance at Olive Garden; difficult to decipher between success of initiatives and broader industry trends.
  • Deferring the Olive Garden remodel program due to insufficient returns.
  • Management expects 2H15 food inflation to be up +2-2.5%, up from prior guidance of 1%.
  • Restaurant level margins deleveraged 60 bps to 18.6%, despite strong comp growth across the majority of its portfolio.


DRI: Expectations for a Recovery Are Premature - 1


DRI: Expectations for a Recovery Are Premature - 2


DRI: Expectations for a Recovery Are Premature - 333


DRI: Expectations for a Recovery Are Premature - 4


DRI: Expectations for a Recovery Are Premature - 5


Howard Penney

Managing Director


Fred Masotta


LEISURE LETTER (12/17/2014)

Tickers:  MGM, H, CCL


  • Dec 17:  Upstate NY Casino Decision
  • Dec 19: CCL F4Q earnings call:
  • Dec 20: Trump Taj Mahal Closing

Today's Headline Story

The Tiger Hunt Intensifies in Macau & Mainland China  – China launches major crackdown on flow of illicit funds to Macau Beijing is to launch a major crackdown on the multi-billion dollar flow of illicit funds through Macau casinos in a coordinated security drive that will see the country's powerful Ministry of Public Security play a leading role. The unprecedented move turns up the heat on controversial VIP junket operators who generate the bulk of Macau gaming revenues as they come under increasing law enforcement scrutiny amid the "tigers and flies" anti-corruption drive by President Xi Jinping. The new security drive will give the ministry's Economic Crimes Investigation Bureau electronic access to all transfers through the state-backed China UnionPay bank payment card to identify suspicious transactions

Article HERE

Takeaway: Full transparency is now the norm for all aspects of the Macau gaming industry which will lead to a lower resetting of expectations as a result of lower capital flows from Mainland China to Macau.


MGM – MGM Resorts and CityCenter Holdings entered into a settlement agreement with Perini Building relating to Harmon Hotel and Spa.  MGM Resorts announced the company would pay a total of $173 million to resolve the lawsuit, with $20 million going to CityCenter and $153 million to Perini. Of that total, $72 million was in escrow from CityCenter condo sales. The company will pay out $101 million.

Article HERE

Takeaway: Another payment for MGM but the Harmon issue is resolved. Given a very tough Macau environment, MGM may have difficulty fulfilling its debt obligations and staying compliant with its covenants in 2016.


GENS – Genting Singapore today repurchased 4.8764 million shares (14.9% of today's trading volume) for S$5.007 million for an average price/share = S$1.0295. Cumulative shares repurchased year-to-date = 154,347000 or 1.26% of the outstanding shares.  Following today's share repurchase, the total shares outstanding = 12,093,789,298.   

Article HERE


1680.HK – With government approvals and permits for interior furnishings and restaurant checks still pending, the first of three new hotels in Macau Fisherman’s Wharf (owned by Macau Legend Development) - the Harbourview Hotel - may not be able to open by year-end and the more likely opening date for the Harbourview Hotel would be early 2015, prior to Chinese New Year which falls on February 19. The 4-star hotel, comprising 444 rooms, does not house any gaming facilities but has a skywalk that connects it to the Babylon Casino in the waterfront theme park.

Article HERE

Takeaway: Despite assurance of timely construction, there appears to be an effort by the Macau Government to slow/delay the opening of new properties. 


MGM – said the company needs Maryland to fix a legal conflict that sets the opening date for Maryland’s sixth and final gaming venue, the proposed $1.2 billion casino at National Harbor. The requested change would effectively change the date that MGM was awarded the casino license, making it nine months after it was actually awarded by a state site selection committee. Current law requires the Prince George’s County casino open no more than 30 months after the awarding of the license.  A spokesman for MGM National Harbor asked the commission amend the award and effective date of the license to Sept. 2, 2014 — a date representing the end of appeals on a detailed site plan approved by Prince George’s County. Depending on which statutory provision or RFP section is applied, MGM must open the facility on July 1, 2016, and no other date; or only during the time span between June 23, 2015 and June 23, 2016 but no later. The change would reset the 30-month deadline to March 2, 2017.
Article HERE

Takeaway: A technical reset to accommodate the protracted evaluation and award process.


3918.HK – NagaCorp bought back 2.6 million shares between HK$5.92 and HK$6.25 per share, for a total of about HK$15.93 million on December 15.


H – announced the sale of the 346-room Park Hyatt Toronto to Oxford Properties for $90 million, or $260,000 USD per key. Oxford intends to spend approximately $25 million USD in additional capital expenditures over the next five years.

Takeaway: Another disappointing sale from Hyatt.  We had expected a much higher sale price. However, the property did need $25 million of additional capex.


CCL– P&O Cruises has created a multimillion-pound wave campaign and unveiled a new brand identity as it looks to differentiate itself from other cruise lines in the run-up to the launch of Britannia in March. P&O has revealed a new strapline, ‘This is the Life’, an adapted logo and a TV advertising campaign fronted by comedian Rob Brydon. P&O hopes the advertisement will help to attract more non-cruisers. 

Takeaway:  Marketing costs in 2015


Sino-American Relations – Senior Communist Party of China (CPC) officials met with a group of prominent U.S. politicians and scholars on Monday in Beijing for the Second China-U.S. Policy Dialogue, which took place over the weekend. Liu Yunshan, member of the Standing Committee of the Political Bureau of the CPC Central Committee, reviewed the latest meeting between Chinese President Xi Jinping and U.S. President Barack Obama, saying it injected momentum into plans to establish a new type of major-country relations between the two countries.

Article HERE


Operation Foxhunt Exposes 3,200 Officials – China has found more than 3,200 "naked" officials at county-level or above. "Naked" officials are generally senior officials who have sent their families abroad, often as a conduit transferring their ill-gotten assets abroad, and in preparation for their own flight. Some 1,000 "naked officials" who hold key positions and whose families refuse to return were demoted, said a statement from the Organization Department of the Central Committee of the Communist Party of China on Monday. Personnel departments nationwide have held talks with "naked officials" and asked them to choose between accepting less sensitive posts or bringing their families back to China. Those who refused have been disciplined and personnel departments will monitor "naked officials" on a regular basis in the future. China's southern Guangdong Province was the first to make high-profile moves against "naked officials", drafting a law in October banning them holding important positions.

Article HERE

Takeaway: More corruption headlines

Casinos Against Working in Smoking Areas – Three in four casino workers (78%) in Macau don’t want to work in smoking areas, even if casino operators provide them extra incentives, a new survey has found. The results also showed that 49% of respondents were unhappy with the implementation of the smoking ban by their employers. The survey was conducted by the influential Macau Federation of Trade Unions, the city’s largest labor platform. The results were announced on Tuesday. The labor group is a strong advocate of a full smoking ban in the city’s casinos

Article HERE

Takeaway: We believe all casino gaming will be non-smoking by the end of 2015.


El Niño Weather Pattern – Much has been written about lower oil and gasoline prices, however, given the very fair weather across much of the country (but for an early polar vortex that produced a Great Lakes snow event) the weather pattern is that of an El Niño year.  The meteorological definition of a winter El Niño is:  warmer and drier than average in the Northwest, northern Midwest, and northern Mideast United States, so those regions experience reduced snowfalls. Meanwhile, significantly wetter winters are present in northwest Mexico and the southwest United States, including central and southern California, while both cooler and wetter than average winters in northeast Mexico and the southeast United States (including the Tidewater region of Virginia) occur during the El Niño phase of the oscillation. The current 10 day forecast is for a west to east zonal jet-stream resulting in warmer, milder than normal temperatures.  Even the NOAA U.S. Seasonal Outlook for December 2014 - February 2015 calls for prevailing El Nino precipitation and temperatures, click here and see page 32.

LEISURE LETTER (12/17/2014) - El Nino Map

Takeaway: We referenced the developing El Nino in our Leisure Letter on May 1 and October 10.  Unfortunately, the weather tailwind and lower related heating and transportation expenses appears to only benefit casual dining and retail but not yet regional gaming. That could change for December and January.

Wealthy American Travel Trends – With 85% of the affluent planning to spend the same or more in 2015 for domestic vacation travel as in 2014 with 77% planning to spend the same or more for international vacation travel, according to the latest survey by the American Affluence Research Center. In contrast, intentions to cruise among the affluent, at 13% or about 3.2m cruisers, are down slightly from the prior two surveys. However, 8% of the affluent indicated they were undecided about taking a cruise.  Intentions to cruise were highest among those older than 60 (17%) and the wealthiest 1% (26%), who have a net worth of $6m or more.

Article HERE


Virgin Hotels – Virgin Hotels and owner/developer Lam Group revealed the building designs for their first project together in New York City. Located on the southeast corner of 30th Street and Broadway, Virgin Hotels New York is scheduled to open in 2017. The 38-story property will include a block-long high-end retail space, 475 guestrooms, multiple concept suites, food and beverage outlets, a rooftop bar and an outdoor pool and spa. The property is expected to break ground in 2015. Virgin Hotels has a pipeline of properties in the works, including Virgin Hotels Chicago, which is slated to open in January 2015; and Nashville, eyed to open in 2016.

Article HERE


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015. Following CCL's F3Q 2014 earnings release, we recently turned negative on those stocks based on the negative European thesis. 



Takeaway: We remain negative on Macau.


Following two days of meetings in Macau, we are reiterating our negative thesis on the Macau stocks. December could mark the low in investor sentiment but any recovery continues to look further and further away. I was hoping for the emergence of a catalyst and/or signs of a fundamental bottom. Alas, I was disappointed.  


Please see more details in our note: CLICK HERE

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McCullough: I’ve Never Tried Heroin and Europe Looks Like Hell


In this excerpt from today’s Morning Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough discusses the recent moves in European equities and questions whether ECB President Mario Draghi’s money printing (which we affectionately call the “Draghi Drugs”) can still deliver a high. If you’re hedged on the hope that central banks will save you, the fundamental issues in the major economies will hurt you.

Keith's Macro Notebook 12/17: Yen | Oil | UST10YR


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


Takeaway: In today's edition of the Macro Playbook, we contextualize the broad-based de-risking of the HY credit asset class.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares National AMT-Free Muni Bond ETF (MUB)
  4. Vanguard Extended Duration Treasury ETF (EDV)
  5. iShares 20+ Year Treasury Bond ETF (TLT)

Short Ideas/Underweight Recommendations

  1. SPDR S&P Regional Banking ETF (KRE)
  2. iShares Russell 2000 ETF (IWM)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)



Illiquidity Risk Remains in the Junk Bond Market: Consistent with our #Quad4 and #Bubbles themes – which calls for an allocation to relative safety over high yield/junk in the domestic fixed income market – spreads continue to widen in the corporate bond space.


On a WoW basis, OAS on HY USD bonds backed up +19bps yesterday and are now +80bps WoW and +150bps MoM to cycle-wides of 603bps. Obviously, as we have detailed extensively, the energy sector continues to lead declines in the HY USD bond market. Specifically, OAS in this space backed up +23bps yesterday and are now +155bps WoW and +397bps MoM.



Source: Bloomberg L.P.


Not surprisingly, given the dour state of secondary bond market liquidity, emerging market USD debt is selling off as well, with OAS having backed up +81bps WoW and +142bps MoM to cycle-wides of 483bps.



Source: Bloomberg L.P.


In the following two charts, which we have sourced from our presentation on Emerging Markets yesterday (email to obtain the replay), we detail the state of secondary bond market liquidity in the U.S. and specifically as it pertains to EM debt. Needless to say, there is a pervasive lack of liquidity in these asset classes and the crowded nature of these trades amid an era of ZIRP dramatically amplifies the risk of what we have seen thus far – i.e. reflexive selling.


THE HEDGEYE MACRO PLAYBOOK - Secondary Bond Mkt Liquidty




All told, we continue to think this negative re-rating for HY and EM USD debt is likely to have a substantial impact on broader “risk assets” to the extent the broad-base de-risking of this asset class continues.


***CLICK HERE to download the full TACRM presentation.***



#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.


Early Look: Money Man (12/15)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.


Moscow, We Have a Problem (12/16)


#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.


#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets.


The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends.


Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.

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 80.46%
  • SHORT SIGNALS 78.35%