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DRI – STRONG QUARTER BUT GUIDANCE STRETCHING

Full-year same-store sales and commodity guidance seem to be at risk.

 

DRI reported a relatively strong fiscal first quarter with blended same-store sales up 1.1% and EBIT margin improving nearly 130 bps YOY.  One area of continued concern, however, stems from performance at Red Lobster, which lagged the industry benchmark as measured by Malcolm Knapp by 170 bps during the quarter on a reported basis and by 70 bps when you adjust for the timing mismatch around the concept’s Endless Shrimp promotion.  During the prior quarter, Red Lobster lagged the industry by only 30 bps.

 

The company attributed its weaker-than-expected results at Red Lobster to ineffective promotional tactics in the quarter.  Specifically, management referred to its June promotion, which it said did not offer a compelling enough dish and its July promotion, which featured too high of a price point at $14.99.  Helping to offset the weakness at Red Lobster were same-store sales trends that continued to get better at LongHorn and improved trends at the Olive Garden after reporting a sales shortfall during fiscal 4Q10. 

 

The two biggest risks to Darden’s numbers this year stem from the company’s ability to achieve its full-year blended same-store sales growth guidance of +2-3% and rising commodity costs.  There were a lot of questions on the call about the company’s ability to meet its comparable sales targets for the year after coming in below the full-year guided range during the first quarter when the company was lapping its easiest comparison from the prior year.  This was a concern I had going into the quarter; full-year comp guidance seems aggressive as it implies a sharp improvement in two-year average trends.  And, given the fact that Red Lobster’s top-line trends decelerated even further during the quarter on a two-year average basis, even when you adjust for the promotional timing issue, this full-year guidance seems even less obtainable.

 

Management justified its comp guidance and the implied sequential improvement by saying that the industry is recovering faster than it had expected.  Excluding Darden, the industry, as measured by Malcolm Knapp, reported flat same-store sales during DRI’s fiscal first quarter, up from -1.4% in the prior quarter.  On a two-year average basis, this implies a 20 bp improvement making fiscal 1Q11 the fourth consecutive quarter of sequentially better industry trends on a one-year and two-year basis.  This sequential improvement in industry comps during the quarter is, in fact, better than I would have expected but I don’t think it guarantees that trends will continue to get better from here. 

 

Management highlighted recent GDP growth, as opposed to decline, and its correlation to consumer spending as one reason why industry trends should continue to improve.  I would argue, however, that although GDP growth may be positive this year versus negative last year, the rate of growth is decelerating and the Hedgeye expectation is for it to soften further in 2H10, which on the margin will be bad for the economic recovery and will limit the improvement in industry trends.  Even if industry comp trends do improve to -1%, as management guided to, DRI’s 2-3% blended same-store sales guidance assumes 300 to 400 bps of outperformance during the year after reporting only 110 bps of outperformance during fiscal 1Q11.  Red Lobster’s softening trends will make it that much harder to achieve such a wide gap to Knapp.  Management did say that with industry trends improving faster than expected, driven primarily by higher average check growth, that it expects Darden’s full-year gap to Knapp to come in slightly narrower than it initially expected.  That being said, its guidance still assumes sequentially better industry trends and continued outperformance.

 

During fiscal 1Q11, operating margin improved nearly 130 bps YOY.  The company achieved better leverage during the quarter on the food and beverage, labor and restaurant expense lines that I had anticipated.  Management said that positive comp growth, of course, helped in that regard along with the company’s cost saving initiatives related to automating its supply chain, centralizing facilities management and driving sustainability to reduce water and energy usage. 

 

Lower food and beverage costs as a percentage of sales drove the most upside relative to my numbers, which management attributed largely to lower commodity costs.  Management expects to benefit from a similar level of food cost favorability during 2Q, but then expects food costs to be up about 0.5% in the back half of the year.  There is little risk to the company’s 2Q food cost outlook as Darden is locked in on about 90% of its needs through the end of calendar 2010.  Right now, the company is only contracted for about 40% of its commodity needs for fiscal 2H11.  Although management believes that current levels of some commodities it uses are unsustainable and is therefore, not yet locked in, this commodity exposure poses a risk to Darden’s 2H11 numbers.

 

DRI – STRONG QUARTER BUT GUIDANCE STRETCHING - dri sigma

 

DRI – STRONG QUARTER BUT GUIDANCE STRETCHING - us gdp

 

DRI – STRONG QUARTER BUT GUIDANCE STRETCHING - personal income

 

 

Howard Penney

Managing Director

 

 


Comping The Comp - Athletic Trends Robust

As a follow up to last week’s athletic trend update, sales accelerated again this week a trailing 3-week basis in athletic footwear and apparel as well as at retail according to ICSC weekly retail sales. Perhaps most noteworthy is the growth in athletic footwear up +8.3% on a trailing 3-week basis despite facing materially more difficult compares (+3.7%). Importantly, this growth came on higher ASPs suggesting new product flow is starting to gain traction. Recall that next week marks the last tough comp (+4.8%) before footwear has the wind at its back with considerably more favorable compares over the next 2-months until holiday sales in December. In addition, all three channels were strong with discount/mass going positive for the first time in nearly a year. As a result, we expect the athletic space and athletic footwear in particular to outpace overall retail and continue to be a preferred subsector within retail.

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data 1yr 9 22 10

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data 2yr 9 22 10

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data Brand 1 9 22 10

 

Comping The Comp - Athletic Trends Robust  - Fw App Ind AppChan 9 22 10

 

Comping The Comp - Athletic Trends Robust  - FW App Industry Data Channel 9 22 10

 

Casey Flavin

Director

 


Retail: Scary Chart Of The Day

UNCLE SAM: RUNNING OUT OF CRUTCHES

Out of Howard Penny's wheelhouse this morning: 99 weeks of unemployment benefits running out and no jobs.  This is the scenario facing many Americans heading into year-end.

 

Whatever your view on the role of government in today’s economy, it is undeniable fact that government intervention is having a dramatic impact on current conditions as well long term prospects.  With the creation of the Emergency Unemployment Compensation program in 2008, the government provided income for thousands, then millions, of Americans who would have otherwise been left with no source of income.  The result has been a propping up of consumer spending and the chart below shows that story.  The beneficiary, struggling to make ends meet, will spend a large portion of the check he/she receives.  That has helped stimulate consumer spending as more and more people joined the program.

 

These benefits expiring (in the absence of legislative action), will provide a year-over-year headwind for consumer spending.  As of the most recent data points, there are ~500,000 people receiving benefits under the Tier 4 category of the Emergency Unemployment Compensation program. 

 

Retail: Scary Chart Of The Day - Howard Atlas Penny

 

Howard Penney


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 80.64%
  • SHORT SIGNALS 78.57%

MACAU SEPTEMBER UPDATE THROUGH THE 20TH

Another week, another update... Macau growth slows this week

 

Macau slowed a bit in the third week of September.  The daily table GGR for the last 6 days slowed to HK$429MM from a daily average GGR of $485MM for the first 14 days of the month.  Based on the table revenues through the 20th as shown below, we are now projecting total September revenues at HK$14.5-14.7 billion, or 36-38% growth over September of 2009.  Directionally, market shares were similar to our last update, although Wynn’s share loss and MPEL’s share gain have grown.  Wynn's share plummeted to just 6.15% over the last 6 days, while MPEL's market share soared to 19%.  Our understanding is that low hold (~2%) is largely to blame for Wynn's share losses.  If Wynn's hold was really just 2%, normalizing hold while holding the other concessionaires constant implies that their market share would have been around 13.3% through Sept 20th - which is still below the 13.9% share Wynn had in August, and its lowest share since opening Encore. MPEL is up 80 bps since our update last week.  Despite apparently low VIP hold percentage, MGM’s share continues to climb in response to the company’s aggressive commission efforts.

 

MACAU SEPTEMBER UPDATE THROUGH THE 20TH - macau sept1


European Fundamental Bears and Currency Bulls

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD

 

Today, Eurozone Industrial Orders disappointed forecasts on a month-over-month and year-over-year basis. The data is in line with our call for a slow-down in fundamental performance across most of Europe—a call we’re making over the intermediate term TREND and longer term TAIL as austerity measures drag down growth prospects across the region.

 

We’re however not bearish on Europe outright. As we noted in our post yesterday titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.

 

Comparison Boost?

 

Even off “easy” year-over-year compares of -24.7% in July 2009, Industrial Orders rose only +11.2% in July 2010, and undercut a forecast of +16.2% (see chart below). As a compare, June 2010 saw a rise of +22.7% year-over-year off a compare of -25.8%. Certainly as compares get harder into year-end and demand wanes, we’d expect Industrial Orders to slow further.

 

Over the immediate term TRADE to intermediate term TREND we expect European bond yields to continue to push to the upside as investors demand a yield premium to own the sovereign debt threats imbedded in European countries that are struggling to contain bloated sovereign debt and deficit levels.  As an example, today, Portugal successfully issued €450 Million in debt due 2014 that commanded a yield of 4.695% versus a similar maturing bond issued on July 28th that commanded a yield a full 1% less.

 

While we see further downward pressure across European markets over the immediate term TRADE and intermediate term TREND, we’re comforted over the longer term TAIL that the EU community will effectively backstop the region to prevent another Greek default scare, a fact that should help to put in a moderate floor on the downside from here. 

 

Matthew Hedrick

Analyst

 

European Fundamental Bears and Currency Bulls - e.orders


EARLY LOOK: Embracing Change

 

 

EARLY LOOK: Embracing Change - CHART2

 

 

Who would have thought Tim Geithner would be the last man standing on the Obama economic team?
 
First, let me say for those that don’t know, Lizzie O'Leary (@lizzieohreally) is a Washington D.C.-based correspondent for Bloomberg Television who covers politics and economic policy from the White House, Treasury Department, and Capitol Hill. She is officially a @Hedgeye twerp (a term of endearment).
 
So, Larry Summers is going back to Harvard.  President Obama campaigned on the theme “change for America” and a change it is.  Not the change we were promised, but one that is long overdue.
 
There are so many quotes from Larry, Tim or Ben that I could have used to start off the Early Look today, but I chose a one-liner from the @Hedgeye twitter feed that made me laugh, and there were many.  On a serious note, this country is in need of “change” and a new economic team at the White House is a great place to start.
 
Keith said it best last night:


EARLY LOOK: Embracing Change - CHART4

 


The popular press and the new media just skewered Larry Summers last night, which would have made him an easy target for today’s Early Look’s musing.  If you have not figured it out yet, I have embraced a change in my daily process by integrating Twitter as part of it.  For competitive reasons, I’m not going to say how, but Reuters and Dow Jones need to be looking at the Twitter business model very closely as it is their future.
 
The other one-liners that made the highlight reel on the Hedgeye Twitter feed:

 

EARLY LOOK: Embracing Change - CHART3

 

 

Ok, back to reality and the euphoria that has made September performance one of the best since the 1930’s.
 
So far this week, we have learned that the recession has ended and after the close last night the ABC consumer confidence index fell to -46 for the week ending September 19th, down 3 points from the week prior.  This news and the University of Michigan reading from last week spell bad news for consumer spending.  The recession may be over, but there are structural issues that demand immediate attention.  The data bears this out:

 

  • Over 41 million Americans are on food stamps.
  • 17 million children struggle with hunger in America. That's 1 in 4 kids.
  • 1 out of every 6 Americans is on some kind of anti-poverty program.
  • 1 out of every 7 mortgages was delinquent or in foreclosure in Q1 2010.
  • Over 8 million Americans are receiving unemployment insurance.

 

It’s going to have to be an impressive trick if the new Obama economic team can embrace change and get us out of this mess without feeling more pain.  As the saying goes - no pain, no gain!
 
The September month-to-date performance has been nothing short of spectacular, but it is difficult to reconcile this euphoria with the current fundamentals of the economy.  So far for the month of September, the Dow is up 8.62%, S&P up 7.45%, NASDAQ up 11.13% and the Russell 2000 up 10.4%.  With the Dow +0.07%, S&P (0.10%), NASDAQ (0.28%) and Russell 2000 (0.79%) yesterday, there was a clear lack of overall direction following the FED announcement; except for the direction of the dollar, which is getting crushed, down 1.1% yesterday and 3.2% over the past month.  The euphoric feel comes from:   

 

  • Consumer confidence is near “the great recession” lows and investor sentiment is near multi-year highs.
  • Some of the market darlings (AAPL and AMZN) look over extended.
  • The MACRO risks (housing and slowing GDP) have taken a back seat in September, but will rear their ugly heads soon.
  • The 2yr and 10yr yields are at record lows and the dollar is getting crushed.

 

The policies of the old Obama economic team were enough to keep us out of a full-blown depression, but were clearly not effectively dealing with the deficit.  The question is not whether or not the next team will prove any more adept at instilling confidence in government’s ability to address the nation’s debt.
 
The burgeoning healthcare bureaucracy, economic stimulus spending, bailouts, and the increase in military spending have all contributed to the explosion in federal debt over the past decade.  The continued growth of that debt has provided an illusion of an economic recovery.
 
In the chart below, we show one example of government spending providing an unsustainable crutch for government spending.  As America’s unemployed make their way through the 99 weeks of benefits afforded them by Uncle Sam through the Emergency Unemployment Compensation program, it is clear from Bureau of Labor Statistics data that the economy is not yet ready to put these people back to work.  Retail sales will certainly be impacted by people running out of these benefits – a stimulus that, like many others, has been financed by increased debt.

 

 

EARLY LOOK: Embracing Change - chart1


 
One last thought:


The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.
-Abraham Lincoln

 


Function in disaster; finish in style
 
Howard Penney

 

 

This note was originally published at 8am this morning, September 22, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK and PORTFOLIO IDEAS in real-time.


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