Takeaway: All the conversations I’m having with investors about DRI are focused on the potential of an Olive Garden REIT.

DRI is due to report FY4Q15 earnings on Tuesday and it’s going to be a great quarter!


Three things to think about following the print:

  1. Are the margin trends sustainable?
  2. What is the stock discounting?
  3. What is management doing to fix Olive Garden?

The current street consensus has DRI FY4Q15 EPS at $0.93, up 150% year-over-year.  Personally, I don’t think it’s out of the question that the company can print $1.00 for the quarter.  The headlines will make for great press as the current management team is doing a great job realigning the cost structure of the company.  Like Bob Evans recent announcement, I also suspect DRI will formally announce it is looking to do a bigger deal in the real estate space. 


Other themes coming out of the FY4Q15 earnings call will be similar to the FY3Q15 themes:

  1. Management is attacking G&A and bringing it to the bottom line
  2. There is significantly less discounting in FY4Q15 vs FY4Q14
  3. Olive Garden sales trends have improved but signs of a renaissance remains elusive
  4. Restaurant margins will improve 130bps in FY4Q15 vs 66bps in FY3Q15
  5. Operating margins will improve 343bps in FY4Q15 vs 264bps in FY3Q15
  6. There will be an intense focus on Olive Garden’s real estate and the potential for a REIT


With the stock at $69 and trading at 11.12x EV/NTM EBITDA, the street is discounting that DRI is going to have a great quarter.  The question becomes how great is great and what is the upside from here?  The bigger question shareholders need to ask is with all the improvement in profitability are they starving Olive Garden of essential capital and the initiatives to be relevant again? 


All the conversations I’m having with investors about DRI are focused on the potential of an Olive Garden REIT. The potential for a REIT was a big focus of the Starboard presentation on value creation.  To be clear, all of the talk of a REIT is temporary as it’s the last financial lever the board can pull to create value. The REIT discussion is also distracting the conversation away from the real issue and that is the Olive Garden renaissance plan. 


I have no edge on the potential of a REIT, but the chances of a REIT seem very slim in the restaurant space.  Contributing to the heightened expectations for DRI REIT are Hudson's Bay, Bob Evans and others announcing plans to potentially monetize their real estate into separate publically traded companies?  Time will tell!


So what is DRI stock discounting?

Using the same price to Price/Sales analysis we used to determine that DRI was undervalued three years ago now shows that the company is overvalued.  At the very least, there is a significant component of the current value that accounts for the value of the real estate portfolio.


Referring to the Starboard presentation on the Darden real estate opportunity, the investors valued the DRI real estate portfolio (including Red Lobster) at $3.8-$4.2 billion.  Assuming Red Lobster was $2.2-$2.5 billion of the total, the remaining Olive Garden real estate is worth around $1.4-$1.7 billion (before tax leakage).


Our sum-of the parts analysis of DRI has the collective brands worth an enterprise value of $7.4 billion or approximately $49.74 per share.  This implies that the market is valuing the DRI real estate at $2.4 billion or more than 100% of the value of Olive Garden’s real estate. With the stock at theses levels there is significant pressure on management and the Board to come up with a creative real estate transaction that makes Olive Garden relevant again.


If a deal can’t get done does DRI run the risk of becoming the Sears holdings of the restaurant industry? Nobody wants to follow the example of Sears Holdings Corp, Eddie Lampert, who had been criticized for starving the retailer of the capital reinvestment needed to keep stores refreshed and relevant in the minds of consumers.


Once we get past the DRI financial engineering and cost cutting the ultimate value of this company will be driven by Olive Garden and right now it’s being starved of capital to be relevant to the consumer.








  • FDA increased regulations on partially hydrogenated oils, a main source of trans-fats. Even with all the reports out there that this is going to cost manufacturers billions of dollars we remain optimistic. Recognizing that our top ideas and many other food manufacturers have worked to drastically reduce the use of trans-fat over the last decade.
  • One new Avian Flu case was confirmed in Wright County, Iowa on Thursday. One million commercial chickens were taken by this particular outbreak, bringing the total number of affected birds in the U.S. to 48 million. This ended an 8 day outbreak-free period.
  • Post Holdings released a brief Avian Flu update on Thursday regarding a company-owned flock in NE that had presumptively tested positive for AI. The flock went through a number of testing rounds with the USDA under quarantine, but today was released from such, as the outbreak was not confirmed.




  • GIS may benefit from the essential trans-fat ban brought on the FDA, as it has reduced trans-fat content in 350 of its product since 2008. The thought-to-be unsafe anti-stick trans-fats are still used in their Betty Crocker, Bisquick and Pillsbury brands. It will be difficult to use alternatives for those lines. 
  • Company named to Newsweek’s 2015 Green Rankings, placing 48th out of 500 US publicly traded companies, and 77th out of 500 global companies.
  • In the food and beverages industry alone, GIS came in 4th of 19 in the top 500. “[We will] continue pursuit to create economic, social and environmental value in the countries where we operate.” –Jerry Lynch, VP & Chief Sustainability Officer.




  • Sentiment remains high on WWAV after the acquisition of Vega was announced last week. The price has been on a slow but steady increase. Please contact us at for our WWAV Black Book we released last week.




  • The street continues to like the stock, but after yesterday’s close, it is trading at -1.48% from its 52-wk high. Low EPS estimates and current P/E valuation are, however, beginning to weaken the confidence of consensus. We are sticking to our guns that HAIN is not an organic company, and does not deserve its current valuation!




  • Jana Partners LLC has filed an SC 13D form against ConAgra Foods (CAG) with activist intentions. They have stated their plans of making changes to the Board of Directors. Changes to this consumer staples giant will likely bring on more long term competition for other industry players.
    • Jana believes that the company has underperformed in creating shareholder value, stemming as a result of their recent acquisition of Ralcorp, Inc.
  • HSY announced a productivity initiative, anticipating the elimination of about 300 jobs, beginning with a voluntary separation option in which transitioning employees will receive help. The program will yield up to $75 million in savings, which will be reinvested in the company, in part, to create long term shareholder value.
  • HSY also lowered EPS guidance for FY15 from $4.30-$4.38 to $4.10-$4.18, due to growth expectations in China having not been up to par for May and April. Trends on a more macro scale are affecting consumer behavior, in addition to increased competition within the category in China.
  • Nestle is reducing its African workforce by 15%. The company says it is partially due to an extremely small and static regional middle class, and also because the turnover in the region has failed to grow as was expected in previous years.


Food and Organic Relative Performance versus the SPX



Consumer Staples Best Ideas List




REPLAY: LONG WWAV | A Truly Healthy Company

Last Thursday we presented our 102 page Black Book on WWAV and why it is deserving of being on Hedgeye Consumer Staples’ Best Ideas list as a Long.



Presentation: CLICK HERE


Our thesis builds off of three main pillars:

REPLAY: LONG WWAV | A Truly Healthy Company - CHART 1 


WWAV has been on Hedgeye’s Consumer Staples Best Idea list as a Long since 4/11/14, and since then has risen approximately 80%. But we don’t believe it is stopping here, management at WWAV is just warming up.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 2 


Since their IPO in 2012 WWAV has added three businesses, Earthbound Farm, So Delicious and most recently Vega.  One sector they do not play in currently is meat alternatives, and we believe this could be a big growth driver for them in the future.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 3 


This company has been performing admirably, with low-double digit organic growth over the last eight quarters.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 4 


We strongly believe that the growth of plant-based foods is just beginning ― they have barely penetrated 30% of households in the U.S.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 5 


Another alternative to creating shareholder value is the potential of a competitor buying WWAV. We believe that there is a strong possibility of this happening within the next 1-3 years. Given the desperation for growth in this industry, companies have to be looking at WWAV as a possibility.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 6 


Commodity pricing is always going to be an issue for a natural organic CPG company or any CPG for that matter. WWAV management has been able to keep the affects in check as they maximize efficiencies across their supply chain. Additionally, WWAV has amazing brand loyalty, highlighted by their Horizon brand, in which all top line growth recently is driven by price, signifying that customers need the product and are willing to pay the premium.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 7 replace 


Bottom line this is one of the best companies we can find in the consumer staples space. And we are looking forward to continuing to keep you up to date on all the action.


REPLAY: LONG WWAV | A Truly Healthy Company - CHART 8 replace v2 


Please reach out if you have any questions.

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Got Risk? A Deep Economic Dive With Josh Steiner on Interest Rates, the Fed, Housing, Markets & More

Hedgeye Financials Sector Head Josh Steiner recently sat down with macro analyst Ben Ryan on The Macro Show. Their in-depth conversation covers a ton of financial ground and is a must-see discussion of the key issues and risks facing investors right now.


The Week Ahead

The Economic Data calendar for the week of the 22nd of June through the 26th of June is full of critical releases and events.  Here is a snapshot of some of the headline numbers that we will be focused on.


The Week Ahead - THE 06.19.15 Week Ahead

Investing Ideas Newsletter

Takeaway: Current Investing Ideas: FNGN, OC, PENN, GIS, GLD, VNQ, EDV, ITB, TLT & HIBB

Below are Hedgeye analysts’ latest updates on our ten current high-conviction long and short investing ideas as well as CEO Keith McCullough’s updated levels for each.  Please note we added Financial Engines (FNGN) this week. We feature two additional pieces of content at the bottom. 


Investing Ideas Newsletter      - Investing Ideas6 19 2015 4 51 23 PM

Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


Investing Ideas Newsletter      - Fed cartoon 06.17.2015 dove

"You're one bad jobs report away from no September or December rate hike."

-Hedgeye CEO Keith McCullough on Wednesday after FOMC statement



Editor's Note: The research summary below was written by Co-Financials Sector Head Jonathan Casteleyn.


We added Financial Engines to our Investing Ideas list as a long position this week. In a nutshell, this leading independent 401K advisor continues to grow its market share off of the back of a regulatory tailwind that alludes to corporate responsibility for the performance of retirement plans. Essentially for a annual fee of ~40 basis points or (0.40%), Financial Engines will professionally manage your 401K utilizing the plan’s underlying options. The company’s performance has been effective and the growth/maintenance of retirement assets is vitally important for an aging American population. While most of the Street sees an expensive small cap company with slowing growth, we see a future mid cap stock with more room to grow market share, revenue and EBITDA. With 20% short interest already in the stock, we think these overly Bearish positions will have to be covered as results turn higher adding incremental buying power to this stock.  


Our 5 keys tenets for our positive disposition on FNGN stock are:


1.) Independent advisory services are effective, with over 300 basis points in annual out performance versus retirement accounts that do not have an independent advisor. This continues to make the case for ongoing penetration of independent managers and target date funds within the 401K channel.


Investing Ideas Newsletter      - z chart 5


2.) Regulatory tailwinds are persisting off of the back of the Pension Protection Act of 2006. With the outline of a QDIA in the retirement marketplace, employers may be liable for a retirement plan's under performance. As a result, plan sponsors are continuing to push independent advisory firms into their investment plans and as a QDIA.


Investing Ideas Newsletter      - z chart 6


3.) The most important beacon of the health of the firm is assets-under-contract (AUC) in our view. AUC is now inflecting higher year-over-year for the first time in 4 quarters which should force improved revenue guidance for the firm. AUC is strongly correlated to both revenue and assets-under-management for the firm.


Investing Ideas Newsletter      - z chart 7


4.) The firm's Income Plus product has increased the overall adoption of its services. While there is some overlap with its existing services, Income Plus has almost doubled the uptake of the company's existing professional management product since 2011.


Investing Ideas Newsletter      - z chart 8


5.) The stock has discounted a lot and short interest balances are near record highs again. The last time open interest was over 20% of float, it was a good time to buy the stock.


Investing Ideas Newsletter      - z chart 9


The largest player in the U.S. asphalt roofing industry, GAF/ELK, announced on Monday a price increase for its roofing products starting in August (click here to access the announcement).


While it is certainly a positive for Owens Corning that the leader is taking the initiative in announcing price increases – often followed by the rest of the industry – what really matters is the actual deal worked out with the distributor/retailer including rebates and incentives/discounts. If price increase announcements were indicative of what actually happened to prices (and shingle manufacturer margins), OC would be among the most profitable companies in history.


More importantly, the industry seems to have gotten past the 2014 finger-pointing stage.  If true, the OC Roofing segment margins should be positioned for a solid rebound as its Insulation and Composites segments continue to strengthen. 


Shares of Penn National Gaming are up approximately 9% since it was added to Investing Ideas on May 26. Our Gaming, Lodging & Leisure team reiterates their high conviction on the stock and notes that Ohio and Kansas have both been super-strong revenue generators in the month of May.


This positive development has has led our analysts to raise their estimates even higher (and we're already the highest on the street...)



It was a busy week across the housing space with a host of fundamental releases, builder earnings and notable regulatory updates.   Net-net-net....the past week offered another positive update on the state of the residential real estate market with housing turned in a second week of strong, positive absolute and relative performance.


To highlight the major releases:


Builder Confidence  

The NAHB HMI (Builder Confidence Index) for June surged across all categories and in all regions, posting its best reading in almost 10 years.  Further, given the historical tendency for Builder Confidence to front-run negative inflections in headline Consumer Confidence, ongoing strength in the HMI suggests the confidence cycle is not yet past peak.


New Home Starts  

Total Starts declined -11% MoM to +1.036 MM units with SF and MF starts declining -5.4% and -20.2% month-over-month, respectively.  Context with respect to the Starts figures is key, however.  The moderate retreat in May follows the largest sequential increase in 25 years in April which saw Starts rise +22% month-over-month.  Indeed, average Total Starts in April-May are +9% above the TTM average and represent the strongest two-month period of activity since 2007.  Permits, meanwhile, rose to an 8-year high advancing +11.8% sequentially and +25% year-over-year.   The strength in permits augurs forward strength in Starts and suggest residential construction spending will be (increasingly) supportive of GDP growth over the next couple quarters.



The CFPB announced on Wednesday that it would be delaying the implementation of the new TRID regulations by two months – from August 1st to October 1st.  As review, the slide below summarizes the background, challenges and goal of the new regulations.  Industry angst has been building into the implementation date and its been our view that integrations challenges could have a modest-to-moderate impact on reported transaction activity.  The delayed implementation along with the subsequent enforcement grace period will allow stakeholders to integrate the changes during a seasonally slow period, providing nearly 6 months of ‘live prep’ ahead of the 2016 spring selling season.  It also effectively removes a headwind to 3Q performance – a period characterized by seasonally weak absolute and relative performance for the housing complex


KBH Earnings

KB Homes announced strong 2Q earnings results on Friday.  The company beat top and bottom line estimates, reported improved gross margins and a rising backlog, offered positive commentary on the current pace of demand/pricing and stepped up their outlook for margins over the balance of the year.  In short, the top down inflection in housing fundamentals (ie. demand and price) we’ve been calling for and highlighting since late last year is now showing up in the reported numbers and being embedded in forward guidance from management.


Investing Ideas Newsletter      - z cd Builder vs Consumer Confidence LT


Investing Ideas Newsletter      - z cd TRID


Nothing has changed to our bullish General Mills thesis. We are still long for all the same reasons reiterated below. Earnings are coming up on July 1st, that will be a big date for us.


We remain very bullish on the strength of General Mills’ brands and the long-term growth potential of the stock. The 2015 fiscal year was a busy one for GIS as they underwent a major restructuring project and the $820MM acquisition of Annie’s.


We see multiple ways you can win being LONG GIS:


1. The current management transforms into an Activist management team -       15% chance

2. Fundamentally – Gluten Free Cheerios is a home run – 40% chance

3. Management sells the company – 10% chance

4. An Activist shareholder takes a position – 35% chance


All-in-all this stock is built for growth and with it currently paying a generous 3.1% dividend, that has never been decreased or interrupted, it is a worthwhile bet that this ship will turn.


Got Sturm und Drang?


After all was said and done, rates finished on their lows of the week. The 10-year Treasury yield finished at 2.26%, down -8 basis points on the day, -13 basis points on the week and down -28 basis points from last week's "breakout" highs.


Investing Ideas Newsletter      - z dd chart


Bottom line right now remains that Lower-For-Longer is firmly intact as long as US #GrowthSlowing is. As Keith pointed out on Friday, Consensus Macro is still stubbornly sticking to the tired idea that rates have to go higher - they just have to... because, they haven't?


All told, it was a great week sticking with the process on the long side of bonds.


Below we feature an in-depth discussion from Senior Macro Analyst Darius Dale which does a thorough job outlining where our macro team currently stands with respect to the Fed, interest rates, markets and economy. The prescient discussion occured just hours before release of the FOMC statement.


Click image to watch

Investing Ideas Newsletter      - zdariusdale


At last week's Investor Meeting (and this week at an e-Commerce conference) Wal-Mart management reiterated their commitment to investing for growth in the digital channel. CEO Doug McMillon stated that "priority one is run great stores and clubs right now. Equally important, we've got to build a great e-Commerce and mobile commerce business."


That last part spells trouble for a company like Hibbett Sports where the real estate strategy was centered around leveraging traffic from Wal-Mart stores.


The thought process was simple -- sell higher-priced sporting goods that Wal-Mart doesn't offer and benefit from the foot traffic flow. Hibbett was able to expand and grow in its core Southern market by following Wal-Mart's lead. But that growth strategy is tapped out now. And Wal-Mart is turning toward digital for growth which equals lower foot traffic.


The problem for HIBB is the company can't park next to Wal-Mart online. This means there is limited to no opportunity for growth in Hibbett’s core strategy. Any form of growth from here on out – in existing stores, new stores, and online, will all come at a lower margin.


* * * * * * * * * * 


no easy fix at twitter

The problem with TWTR is the business model and expectations. Dorsey likely can't fix the former; managing the latter won't be much easier.

Investing Ideas Newsletter      - Twitter cartoon 06.12.2015

fund flows: rotation out of bond products

Investors reallocated funds away from bonds last week and continued to avoid active domestic equity mandates.

Investing Ideas Newsletter      - z88

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