Del Frisco’s Restaurant Group (DFRG) is on the HEDGEYE Restaurants Best Ideas list as a LONG. 


We see as much as 25% upside from current levels.


As a reminder we are hosting a conference call on the looming crash in beef prices on Thursday, October 15th at 1:00pm ET, view our invite HERE


As expected, DFRG reported an ugly quarter, but the worst is behind the company and management is adjusting its operating strategy to improve profitability in 2016.  The current EPS estimate of $0.95 for 2016, looks to be manageable given the changes the company is making to the operating strategy.  Importantly, the current estimate does not likely reflect the improved profitability ($0.10-$0.12) from closing the two underperforming stores in 2015. 



DFRG reported consolidated revenues of $68.6 million, coming in short of consensus estimates of $70.25 million. A bright spot in their performance was Cost of Goods management, bringing down the cost as a percentage of revenue to 29.0% from 30.2% and versus consensus estimates of 29.48%. Adjusted net income came to $0.9 million, or $0.04 per diluted share, missing consensus estimates of $1.03 million in total but matching consensus EPS estimates of $0.04.



The company is now guiding to total comparable restaurant sales of -1.0% to 0.5% versus previous estimates of 0.5% to 1.5%.  Consensus estimates are now suggesting 0.1% for the year, well within the range of possible outcomes for the quarter. 



Del Frisco’s Double Eagle same-store sales (SSS) declined -1.4%, the decline in comparable restaurant sales was comprised of a -4.3% decline in customer counts, partially offset by a +2.9% increase in average check.  Importantly, the Double Eagle 2-year trends improved by 40bps sequentially.  If you are bearish on DFRG, at this point it’s easy to highlight this performance as a concern.  The issues at the Double Eagle franchise are cyclical, not secular, as this is one of the best brands in the industry. 



Sullivan’s SSS increased +1.2%, the improvement in comparable restaurant sales was comprised of a +0.8% increase in customer counts and a +0.4% increase in average check.  Importantly, Sullivan’s 2-year trends improved by 200bps sequentially.  Sullivan’s has made progress on improving the top line, but we do not have significant improvement built into the model for 2016.



Del Frisco’s Grille SSS decreased -3.5%, the decline in comparable restaurant sales was comprised of a -1.2% decline in customer counts and a -2.3% decline in average check.  In 3Q15, The Grille’s traffic trends improved by 250bps sequentially.  If management can get SSS at the Grille to flat in 4Q, and provide a stronger outlook for performance in 2016, the company’s valuation will improve.




We like the 2016 set up for DFRG.


While the company is not providing guidance for 2016, the current consensus numbers look to be conservative.  The company is facing a number of tailwinds in 2016 that will benefit margins and profitability:

  1. A favorable red meat commodity environment in 2H16 and 2017.
  2. Lower costs associated with unit growth.
  3. Margin expansion.
  4. Easy same-store sales comparisons.





Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



The Macro Show Replay | October 14, 2015


Sell Spain w/ Special Contributor Daniel Lacalle

Special contributor Daniel Lacalle will join Hedgeye’s European analyst Matt Hedrick and DOR Daryl Jones on Wednesday, October 21st at 11:00am ET to discuss Spain’s economy and market outlook.


Lacalle is a renowned European economist, who previously worked at PIMCO and was a PM at Ecofin Global Oil & Gas Fund and Citadel.  He is the author of Life In The Financial Markets and The Energy World Is Flat and a lecturer for the IE Business School and Master MEMFI at UNED University.



  • Is the IBEX in crash mode?
  • What are the key economic metrics telling us about the direction of Spain’s health?
  • Will Spain make the necessary fiscal reforms or revert back to its ‘old’ ways?
  • Who wins the general election on December 20th and what’s the impact on the sovereign?
  • What are the challenges for the Eurozone with habitual weak economic links like Spain?



  • Toll Free:
  • Toll:
  • Confirmation Number: 13622670
  • Materials: CLICK HERE


Ping for more information.


Sell Spain w/ Special Contributor Daniel Lacalle - Spain Cartoon

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CAT: Needed - Activist With A Time Machine



On September 24th, CAT lowered its outlook on the same day a firm named Axiom put out a bizarre negative report.*  The shares were crushed, hitting $64 and we suggested ‘covering some’.  Since then, CAT shares have moved a bit higher with new narratives emerging to explain that move.  To be clear, we are in the CAT bear camp but did not want to press after such a large decline.  So what are the new positive stories on CAT?  We have heard a few of late: 

  • Activism
  • Chinese Stimulus/Reflation
  • Hey, Look At That Dividend


* The report is a rehash of this earlier sensationalized bearish thesis




Without a time machine and control of the commanding heights of the economy, it is hard to see how an activist could bring value creating change to CAT.  We suspect that some C-suite management changes would generate a one-day pop in the share price, but structural change is unlikely to work.  Most of the businesses that CAT has belong at CAT.  They could sell Solar or Progress Rail, but it is not clear those units are undervalued in the current market appraisal of CAT shares.  They are probably not large enough to move the needle, either.  Attempting to unlock value by divesting non-core assets would likely create more problems than it would solve. 


What would we do as an activist at CAT?  Probably find another target.  CAT has an entrenched culture, a dealer network with its own agenda, and a strong market position/product portfolio. It does not need an activist. One could argue for a broadening of the Construction Industries portfolio into adjacent markets (e.g. cranes), but this is also likely to be too little too late.  Basically, an activist cannot make mines expand, drillers drill, or retroactively back out of the Bucyrus deal.



Chinese Stimulus


As a short, we certainly worry that a large Chinese stimulus proposal could fuel optimism for CAT, much as it did coming out of the financial crisis.  Given the supply dynamic in key mining categories, like iron ore, we would view a strong rally on the expectation of stimulus driven demand as a potential set-up for a short entry. 


Weakness in commodity demand is not limited to China, either, with US coal a key market that is also under pressure.  On the bulk side of ‘old China’, it looks like a demand rebound would take quite a bit more stimulus than was delivered to fight the financial crisis.


CAT:  Needed - Activist With A Time Machine - China Rail Freight



Hey, Look At That Dividend


CAT’s dividend has not helped stem the decline in the shares so far, and we do not expect it to matter much.  While we do not explicitly forecast a dividend cut, the combined repurchase plus dividend may become a bit of a struggle in 2016.  CAT is on pace for a dividend of a bit over $3 per share and about $1.75 in repurchases.  That $4.75 pace does not stack up well against a current 2016 consensus EPS estimate of $3.88.  Of course, CAT’s cash generation and funding options may facilitate dividend and repurchase activity beyond EPS, but it is not a great set-up for dividend dependence.  Also, we expect issues at CAT Financial, which could also end up consuming some cash if our views play out.



Upshot:  The latest round of CAT bottom callers are likely to be met with the same success as earlier ones.  We think CAT is mired in a multi-year downturn in resource-related capital spending.  While the company has already guided lower, 2H 2015 is not likely to generate much optimism.  In many key ways, 2016 looks worse.  We would look to press our bearish view if the shares rebound on faux bullish narratives.


Recession Setting Sail For Europe?


In this excerpt from The Macro Show this morning,  Hedgeye CEO Keith McCullough responds to a subscriber’s (flawed) question on “accelerating” European economic data. He cautions viewers about the “unequivocally red” data out of Germany and how recent developments may change the monetary calculus of ECB President Mario Draghi and roil global markets. 

Cartoon of the Day: Reflationary Reality Check

Cartoon of the Day: Reflationary Reality Check  - reflation cartoon 10.13.2015  2

"While I didn’t live during the depression, I did leave home when I was 16 years old," wrote Hedgeye CEO Keith McCullough in today's Early Look. "My teammates and I have a DNA that will not fade when we have conviction in something we see that others don’t. Both #Deflation and #GrowthSlowing risks remain. Tell the Establishment we said so."

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