DRI Darden Restaurants Inc

Darden Restaurants Inc. (DRI) is slated to release its first quarter 2012 earnings on September 19, after market closes. The current Zacks Consensus Estimate for the first quarter is pegged at 78 cents per share (reflecting a year-over-year negative growth of 2.24%).

Darden has outperformed the Zacks Consensus Estimate in two of the last four quarters and was in line in the remaining two quarters. The average earnings surprise was positive 3.38%.

Fourth Quarter Recap

Darden’s fourth quarter 2011 earnings of $1.00 per share were in line with the Zacks Consensus Estimate and grew 23.0% year over year.

Total revenue spiked 6.8% year over year to $1,990.4 million and also edged out the Zacks Consensus Estimate of $1,990.0 million.

Combined same-store sales for the company’s three core brands, namely Olive Garden, Red Lobster and LongHorn Steakhouse, rose 2.2%.

During the quarter, Darden hiked its quarterly dividend by 34% to 43 cents per share, indicating an annual dividend of $1.72.

Guidance

For the first quarter of 2012, Darden expects earnings per share from continuing operations of 78 cents. The company estimates combined same-restaurant sales for its three core brands, Olive Garden, Red Lobster and LongHorn Steakhouse to increase 2.8% during the period.

The U.S same restaurant sales at Red Lobster, Longhorn Steakhouse and Specialty Restaurant Groups are estimated to escalate 10.7%, 4.8% and 5.1%, respectively, in the first quarter of 2012. However, comparable restaurant sales at Olive Garden are expected to plunge 2.9%. 

For fiscal 2012, Darden expects earnings per share growth to remain at the lower end of its previously announced range of 12% to 15%. However, the company raised its overall sales growth by 0.5% to 6.5%-7.5%, due to an increase in blended same-store sales growth estimate for its three core brands to 3% from its earlier forecast of 2.5%. The company reiterated its 80 to 90 net new restaurants' goal for fiscal 2012.

Estimates Revisions Trend

Estimates fell significantly in the last 30 days implying that the analysts depict a negative outlook for the upcoming quarter. The current Zacks Consensus Estimate is $3.79 for 2012, reflecting a year-over-year growth of 11.22%. For 2013, the Zacks Consensus Estimate is $4.29, reflecting  a year-over-year growth of 13.17%.

Agreement of Analysts

Revision trends in the last 30 days have drifted toward the negative side with just one positive change. For the first quarter, 22 out of the 24 analysts covering the stock lowered their estimates while none moved in the opposite direction. For fiscal 2012 and 2013, estimates were slashed by 23 and 17 analysts, respectively, while one raised the same for fiscal 2012.

The analysts remain skeptical about the coming quarter as Hurricane Irene will likely impact the company’s first quarter 2012 earnings by 2 cents and same-store results at Red Lobster, Olive Garden and LongHorn Steakhouse restaurants by 20 to 30 basis points.

The analysts believe that first quarter results will also be impacted by food cost pressure. As a result of the storm, Darden has trimmed its 2012 earnings estimate.

Magnitude of Estimate Revisions

Over the past 30 days, Darden's estimates have dropped by 10 cents for the first quarter and by 6 cents for both fiscal 2012 and 2013 respectively. In the past 7 days, estimates have not changed.

Our Take

We expect Darden to report first quarter earnings in line with the Zacks Consensus Estimate, since all the persisting challenges have been taken into account and no further downside exists in the near term.

We prefer Darden Restaurants’ strong value proposition, menu improvements, remodeling programs (especially at LongHorn Steakhouse and Red Lobster), excellent unit-level execution with differentiated brands and expansion plan. LongHorn Steakhouse will also likely deliver strong results in the upcoming quarter.

Management anticipates that the trend of increased productivity and lower employee turnover will benefit fiscal 2012 results. Labor and restaurant expenses are expected to be down annually aided by sales leverage and transformational cost reduction initiatives.

Darden also expects improving labor costs to continue through 2013 given a new labor matrix/scheduling system. For 2012, Darden expects to generate $65–$75 million in costing savings.

However, the company is not completely immune to challenges. While Red Lobster is wooing customers with a number of promotional activities, rising sea food costs may restrain the concept’s margins. Additionally, underperformance of Olive Garden (another core brand of Darden) poses a serious threat to Darden.

Moreover, stiff competition resulting in higher discounting rates and promotional offers, increasing food costs for the upcoming year and cautious consumer spending also remain causes for concern.

We have a Zacks #3 Rank (short-term Hold recommendation) on the company’s shares. We also reiterate our long-term Neutral rating.

One of Darden’s primary competitors, Red Robin Gourmet Burgers Inc. (RRGB) reported second quarter 2011 adjusted earnings of 48 cents per share, handily beating the Zacks Consensus Estimate of 36 cents and the year-ago quarter earnings of 29 cents.

 
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