DRI: Room to Breathe

We are removing DRI from our Investment Ideas list as a short.

 

We do, however, maintain that Darden’s stock is moving significantly higher ahead of a turnaround in the core Olive Garden business.  In addition, there are valuation concerns following Friday’s “beat-and-raise” 3Q15 earnings release.

For the quarter, the company reported above consensus EPS of $0.15 (on slightly better same-store sales, lower costs, and higher margins) and guided to FY15 EPS of $2.45-2.48 versus the prior $2.25-2.30 range.  Lastly, Darden issued an above consensus 4Q15 EPS target range of $0.91-0.94.

DRi shares are fully-valued, trading at a 2016 P/E of 23.2x – we still see fair value in the range of $55-58.

 

Management also guided to the following 4Q15 same-store sales targets:

  • Olive Garden +1.5 to 2.5% versus consensus of 1.6%
  • LongHorn Steakhouse +4.0 to 5.0% versus consensus of 2.3%
  • Specialty Restaurant Group collectively at +2.5 to 3.5%

In the short run, the next 6-12 months will be a crucial cost cutting opportunity for the new management team.  As we suspected on the call, management held out a significant number of carrots to the investment community to highlight the changes that are being made within the company.  It has formally announced the sale leaseback of its headquarters in Orlando and has begun to test the waters by selling some properties upon which its restaurants sit. 

 

Management was very upbeat with how things are progressing on that front so far, noting that cap rates have been below 6%.  More generally, management maintains that it wants to move to a more asset-light model if it makes business sense.  Management provided little detail on the implications of the math on the income statement if they significantly reduced the number of properties they owned.

 

Operationally, management deliberately ran less price-point oriented promotions at Olive Garden in 3Q15 than a year ago, allowing for significantly improved profitability at Olive Garden.  They also scaled back media spending to historical levels.  These factors should continue to be in play for the next six months, during which it would be unwise to short the stock.

 

A simple reminder that Olive Garden is still struggling is that it continues to lose market share.  Traffic has now declined for the past four years and continues to trail the industry by about 1%.

 

We think it’s premature to give credit to management for improved SSS trends at Olive Garden.  Given the industry-wide noise created by weather and lower gas prices, it’s difficult to tell what the real trends look like at Olive Garden.  To that point, the earnings call was focused on financial engineering with little mention of food or operational changes being made to improve the concept.  Olive Garden needs a significant dose of innovation and improved assets before this chain be on a sustained path of positive traffic trends.  


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

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more