RRGB Red Robin Gourmet Burgers Inc

We maintain our long-term Neutral recommendation on Darden Restaurants Inc. (DRI) on a host of factors.

 Darden’s strong value proposition, menu improvements, extensive advertising and excellent unit-level execution with differentiated brands position it well for growth. The company’s value-for-money entrees give it an advantage in the highly competitive casual dining industry.

Darden is one of the few casual dining chains that expanded during the economic downturn and tried new concepts to enhance top-line growth. The company expects to open 70 to 75 net new restaurants in fiscal year 2011. Despite the sluggish economic revival, management’s consistent unit opening affirms its confidence on fundamentals. Darden presently estimates 19% earnings growth year over year as compared with 17–18% projected previously. We also remain optimistic on the development agreement to set up of 60 restaurants in the Middle East over the next five years.

One of Darden’s brands, LongHorn Steakhouse will likely perform well in fiscal 2011 on the back of increased media support and promotion as well as remodelling. Incidentally, remodeling initiatives had also benefited Darden’s yet another brand, Red Lobster. Hence, the company has decided to give a new look to one of its struggling core brands, Olive Garden. Management expects 2011 blended U.S. same-restaurant sales for Red Lobster, Olive Garden and LongHorn Steakhouse to remain between1.5% to 2%. 

However, like all other restaurant companies, inflationary pressure remains an overhang on Darden. In order to mitigate the impact of rising costs, the company already has most of its commodity needs locked in for fiscal 2011. This offers good visibility on costs for the next quarter and augurs well for Darden’s cost-saving initiatives. But management foresees industry-wide increases in commodity and energy costs for fiscal 2012.

Additionally, dependence on core brands Olive Garden and Red Lobster, which are approaching saturation, will likely pose a threat to Darden. While Red Lobster is wooing customers with a number of promotional activities, rising sea food costs may restrain its margins. The U.S. restaurant industry is still value sensitive. Hence, the failure of any promotional offer will put pressure on the same-restaurant sales growth. In the recently concluded third quarter, dishes featured in Olive Garden promotion, especially in February, failed to be accretive to the company’s growth. As a result, Olive Garden’s same-restaurant sales in the third quarter equaled the prior-year quarter but remained shy of management’s projection.

Zacks Consensus Maintained

Over the last 30 days, the magnitude of estimate revisions for Darden has remained unchanged with estimates for fourth quarter 2011 and first quarter of 2012 being $1.00 and 91 cents, respectively.

Competition with restaurants like Brinker International (EAT) and Red Robin Gourmet Burgers Inc. (RRGB) is expected to remain fierce regarding price, service, location and concept, leading to adverse effects on the company’s restaurant operating margins and profits. Darden currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

 
DARDEN RESTRNT (DRI): Free Stock Analysis Report
 
BRINKER INTL (EAT): Free Stock Analysis Report
 
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
 
Zacks Investment Research