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.
This morning we shot a brief video offering our updated, detailed thoughts on the Chinese economy and its financial markets, which are best summarized in the following picture:
Watch the video replay of this presentation below.
CLICK HERE to download the accompanying slides.
As always, please feel free to ping us with any follow-up questions.
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Takeaway: Risk is net neutral to slightly negative on the heels of the Fed and delayed progress in Greek-Eurozone bailout discussions.
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
Risk perception in the U.S. and Europe improved but is neutral to negative as (1) the Fed dropped its "patient" verbiage but Chair Yellen moderated the market reaction in her press conference, and (2) as Greek-Eurozone bailout discussions made little progress.
European Financial CDS - Swaps mostly widened in Europe last week with Greek bank swaps rocketing more than 700 bps wider. Although Greek prime minister Tsipras agreed to send a new list of economic overhauls to Eurozone finance ministers, Greek-Eurozone bailout discussions are not making significant progress. As German Finance Minister Wolfgang Schäuble said, time is running out for Greece. Meanwhile, Russia's Sberbank saw its swaps tighten by a notable -121 bps to 514.
Sovereign CDS – Sovereign swaps mostly widened over last week. Portuguese sovereign swaps widened the most, by 9 bps to 131. Japanese swaps were the only ones to tighten, by -1 bps to 39.
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 was unchanged at 11 bps.
Client Talking Points
The USD is flat vs. both the Euro and the Yen this morning as the U.S. Dollar Index has held @Hedgeye TRADE and TREND levels of support – at -2.4% on the week, last week was its biggest down week of 2015, but still looks very bullish.
Oil agrees with that conclusion on USD being oversold into Friday’s close, down -2.5% this morning to $45.40 WTI and no immediate-term TRADE support to $42.04 – the 15-day inverse correlation between the USD and Oil is -0.84.
After an expedited 18 basis point drop last week, the UST 10YR Yield hasn’t budged this morning at 1.93%; you’ll get U.S. CPI and Q4 GDP this week; if the Fed is “data dependent”, those 2 data points will be slow.
|FIXED INCOME||24%||INTL CURRENCIES||13%|
Top Long Ideas
iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.
Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.
Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.
Three for the Road
TWEET OF THE DAY
GERMANY: in a rare down day, DAX -1% to +21% YTD
QUOTE OF THE DAY
Courage is the most important of all the virtues because without courage, you can't practice any other virtue consistently.
STAT OF THE DAY
Brazillian soccer legend, Pele (Edson Arantes do Nascimento) scored the most league goals in football history, 1281 goals in 1363 games.
Hedgeye Macro Analyst Darius Dale shares the top three things in CEO Keith McCullough's macro notebook this morning.
Daily Trading Ranges
20 Proprietary Risk Ranges
Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.