Tricky Times for Darden Restaurants
I continue to be a bear on consumer discretionary - except for Kool Aid sales, which I'm extremely bullish on considering how much of it I see everywhere; at least on Wall Street. However, being a bear now is quite a bit trickier than it was last summer and fall [Sep 19: Tough Times Ahead - Restaurants?] when all we heard were denials that the consumer was weaker, that housing could ever slump nationally, that banks could write off hundreds of billions of loans, that the US even had a mild chance at recession, etc. The chart for Darden Restaurants (DRI) shows us why times are trickier of late.
This is a quality franchise - they run Olive Garden, Red Lobster, and LongHorn Steakhouse among others - but it's been swept up by a "not so" rising tide (its sector). Or perhaps a whirlpool otherwise known as the formerly middle class Americans. Now when the Street turned from "denial" to "acceptance" last fall/early winter - you made a ton of money shorting this sort of name. In fact we saw a similar thing happening in retail especially in January [Jan 15: Will There be Anywhere Left to Shop?] There was a complete and utter disaster across that sector, except for Walmart (WMT).
As shown above, in between that period and now you have a much trickier trading environment as we ping pong between Kool Aid (hope) and reality. You can be conceptually correct that there is trouble brewing, but the stock would have rallied strongly into your thesis, causing major pain from the short side - the stock rallied from $25 to $37.50 from February 2008 to May 2008, and after a smaller dip, regained that level as of a few weeks ago. That's the hope phase, aka "as a trader I need to be so early I out-anticipate every other trader out there so I'm going to buy consumer discretionary on the first glint of a silver lining - or even an imagined glint." That would drive people who use old-fashioned things, aka facts, nuts. Well, the darned thing about facts is they have a nasty way of making themselves present every so often. As we see now.
- Darden Restaurants Inc (DRI) warned investors that its quarterly profit will come in well below Wall Street estimates and cut its forecast for the full year on Tuesday, sending its shares down 15 percent.
- Traffic at the company's chains -- which include Red Lobster, Olive Garden and LongHorn Steakhouse -- was worse than expected, a spokesman for the company said. "People were not in the restaurants in the volume we were anticipating," said Darden spokesman Rich Jeffers.
- "For a large part of that period, gas prices were extraordinarily high," John Owens, analyst at Morningstar, said. "It was a challenging consumer environment and it's possible that consumers at the tail end of the quarter were watching Phelps instead of going out," he added, referring to gold-medal winning U.S. Olympic swimmer Michael Phelps. (Aha, the Michael Phelps excuse - let's see if other retailers start using this - our sales stunk but not due to a weak US consumer; but due to Michael Phelps.)
- Of the three, Olive Garden was the only one still trending positive, with a same-store sales gain of 2.4%, while Red Lobster and LongHorn were off 3.7% and 4.9%, respectively.
So we now have the Michael Phelps excuse, but defenders of any weakness in consumer discretionary while blaming weather, backwards looking gasoline prices, Olympics and the like, SOMEHOW forget about the UPSIDE created by the rebate checks. How convenient, eh? So couldn't we argue the numbers are inflated because we stole another $160 Billion from our grandkids? Not when you are a KoolAid-swigging permabull!
So this is the difficult part about this market - if you believe in a weak economy thesis, it does not matter when those in the hope camp buy up the worst of breed stocks on "visions of recovery" - whether it be financial, housing, retail, or otherwise. Even if you are proven to be correct - as we were last winter when we said there would be NO second half recovery - you still lose money, and can lose lots of it ... because at times KoolAid washes over you as the bulls rampage in a parallel universe called "Hope".
Once again this is why I say it is a lot harder managing money than making "predictions" or "large macro calls". I could have (and did) say the consumer will be weak all through 2008 - this has proven to be true and continues to be true. But if I was positioned against the consumer for parts of 2008, I would have lost - not won. I point this out because while I mock the "gas is dropping from $4.19 to $3.79 and hence the consumer is back" thesis weekly, being on the wrong side of that trade - HOWEVER WRONG it is in the SHORT run - can demolish you.
A rampaging pack of "consumer bulls" can destroy your capital before you can be proven correct. And this, folks, is why the markets are an everlasting challenge - it is just as much about sentiment as it is reality and facts.
Case in point, a Darden bull will show up and say "yes, but that's in the past and if you look ahead 6 months, through the valley of muck, the housing picture will improve, credit conditions will improve, commodity costs will fall, and the consumer will be better because energy costs will be down - I urge you to buy Darden stock at these rock bottom prices." Etc. And they might even be correct because the stock (if you believe it can make anywhere near current forecasted estimates) is pretty darn cheap (10x earnings). But this is simply a very difficult type of stock to hold, long or short, since all you are betting on is "sentiment" - not facts.
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This article has 1 comment:
- jay fredrickson
- 36 Comments
My Website
Aug 28 10:18 AMjay
newyorkcitycheap.com
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