Darden Optimistic on 2011 - Analyst Blog

Darden Restaurants Inc. (DRI) recently increased its earnings guidance for fiscal 2011 to a range of 17% to 18% year-over-year growth from its previous projection of 14% to 17%.

The upside in outlook was primarily driven by the clear visibility around cost structure partially offset by recent snowstorms that resulted in a modest decline in sales. Darden also initiated its third quarter earnings per share (EPS) guidance in the range of approximately $1.04 to $1.06.

At the yesterday's analyst meet, management projected commodity and energy inflation of 1.0–1.5% year over year for the second half of 2011 (flat for the full year). Commodity and energy represent 20% of the company's anticipated cost increases.

Management has a better understanding of its cost outlook with most needs through the end of 2011 locked in. The only exception was beef, which was covered nearly 25% (beef represents 14% of the total commodity basket) in late December. Post holidays, Darden has increased its beef coverage to 75% at a lower price point.

Beef and seafood (seafood represents 30% of the total commodity basket) account for 80% of Darden's anticipated food cost inflation. Darden expects prices for beef and seafood to rise 9% and 11%, respectively, over the next 18 months. However, chicken prices are expected to decline 3% for that same period, easing out heightened cost pressure on other commodities. For fiscal 2012, the company forecasts net cost inflation of 3.5–4%.

Same Store Sales Guidance

The Orlando, Florida based restaurant now estimates that blended U.S. same restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse will rise approximately 1.0% for the third quarter, with LongHorn Steakhouse leading the growth as expected despite a severe winter and shift in Lenten season.

While tough weather conditions will likely have an adversely effect on third quarter comparable sales by 80 basis points (bps), an unfavorable shift in the Lent calendar to the fourth quarter accounted for 20 bps.

By concept, U.S. same-restaurant sales are estimated to be up approximately 1.5% at Olive Garden, down approximately 1.0% at Red Lobster and up approximately 4.5% at LongHorn Steakhouse.

According to management, the calendar shift in the Lenten season will likely lower the estimated third quarter same-restaurant sales at Red Lobster by 60 bps. However, we expect difficulties at Red Lobster to be moderated as weather-adjusted same store sales in December and January is scoring at par with the second quarter.

For fiscal 2011, the company expects blended U.S. same-restaurant sales growth for Red Lobster, Olive Garden, and LongHorn Steakhouse in the range of 1.5% to 2.0%, slightly below the earlier guidance of more than 2%. The decline was largely due to an acute winter season. However, the company maintained its approximately 70 to 75 new restaurant opening target.

Darden also reiterated its long-term annual growth targets of 7-9% sales growth, 9–13% operating profit growth and 10–15% EPS growth. Management targets long-term operating profit margin improvement of 20 to 50 basis points a year.

Our Take

Management noted that remodeling programs especially at LongHorn Steakhouse and Red Lobster, new menu offerings, cost saving initiatives and continued innovation around promotional efforts are driving its EPS. But the company is not completely immune to challenges.

Stiff competition resulting in higher discounting rates and promotional offers, rising food costs as well as underperformance at Red Lobster, one of its core brands, continues to weigh on its profits.

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

Darden Restaurants is slated to release its third-quarter 2011 results on March 24. The current Zacks Consensus Estimate for the third quarter is $1.05 per share, representing an annualized growth of 10.35%. With respect to earnings surprises, over the trailing four quarters, Darden Restaurants outperformed the Zacks Consensus Estimate on average by 1.63%.

One of Darden's close peers, Brinker International Inc. (EAT) reported second quarter 2011 adjusted EPS of 38 cents, and revenue of $671 million. While its earnings surpassed the Zacks Consensus Estimate by 6 cents, its revenue missed the Consensus.

 
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