Darden Posts In-Line Earnings, Maintains View - Analyst Blog

Restaurateur Darden Restaurants Inc. DRI posted third-quarter fiscal 2014 results. Earnings and same-restaurant sales were in-line with the numbers provided in its preliminary results on Mar 3, 2014. The company reported earnings from continuing operations of 82 cents per share, down 19.6% year over year from $1.02.

The downside reflects lower sales and higher direct costs due to inclement weather and costs associated with its strategic action plan announced in Dec 2013. However, earnings were in line with the Zacks Consensus Estimate.

In order to enhance shareholder value and leverage the benefits of its strong position, Darden had announced a comprehensive plan to separate its Red Lobster business (either through spin-off or sale of the segment) in Dec 2013. The company also intends to lower unit expansion, which will automatically reduce capital spending by at least $100 million on an annual basis.

Revenues

Total revenue fell 1.1% year over year to $2.23 billion due to sluggish same-restaurant sales, attributable to a severe winter and difficult year-over-year comparisons. Revenues also fell shy of the Zacks Consensus Estimate of $2.25 billion by 0.84%.

The company owns and operates restaurant chains such as Red Lobster, Olive Garden, LongHorn Steakhouse and The Specialty Restaurant Group.

Combined comps at the company's three core brands – Olive Garden, Red Lobster and LongHorn Steakhouse – declined 5.6% versus an increase of 4.1% in the year ago quarter and 0.5% in the previous quarter.

Comps at LongHorn Steakhouse increased 0.3% versus a decline of 1.6% in the year-ago quarter but down from comps growth of 5.0% in the prior quarter. Comps at Olive Garden declined 5.4%, worse than a decline of 4.1% in the year-ago quarter and 0.6% in the prior quarter. Red Lobster comps declined 8.8% compared with a decline of 6.6% in fiscal third quarter 2013 and 4.5% in the prior quarter.

Following positive comps in the past two fiscal quarters, Specialty Restaurant Group comps declined approximately 0.7% in the quarter. The Group had posted comps growth of 2.3% in the year-ago quarter and 4.1% in the prior quarter.

Sales at Olive Garden declined 3.4% year over year to $929.0 million in fiscal third quarter 2014 due to a decline in comps, partially offset by revenues generated from 18 net new restaurants.

Sales at Red Lobster decreased 8.7% to $611.0 million due to a decline in U.S. comps, partially offset by the inclusion of one unit.

At LongHorn Steakhouse, sales were up 9.1% to $363.0 million. As many as 37 net new restaurants and positive comps contributed to the upside.

Sales at The Specialty Restaurant Group increased 11.6% to $320.0 million, thanks to comps growth of 0.1% at The Capital Grille and 0.8% at Bahama Breeze, partially offset by comps decline of 2.9% at Eddie V's, 0.1% at Yard House and 4.4% at Seasons 52. The upside could be attributed to higher revenues from 5 new The Capital Grille restaurants, 4 Bahama Breeze restaurants, 10 Seasons 52 restaurants, 2 Eddie V's and 5 Yard House restaurants.

Operational Highlights

Total costs and expenses during the reported quarter were $2.1 billion, up 1.3% year over year mainly due to a 0.5% increase in cost of sales and a 4.8% rise in selling, general and administrative expenses.

Financial Update

As of Feb 23, 2014, cash and cash equivalents were $127.0 million, up from $84.6 million as of Nov 24, 2013. Long-term debt, less current portion was $2.5 million, approximately flat as of Nov 24, 2013.

Guidance for 2014 Reiterated

The company retained its outlook for fiscal 2014, hoping that the impact of the inclement weather and other challenges in the third quarter would be somewhat offset by the cost control measures adopted by it and will not worsen the situation any further.

For fiscal 2014, the company continues to anticipate a year over year decline of 15.0% to 20.0% in earnings per share.

The company expects Red Lobster and Olive Garden comps to decline in the range of 5.5% to 6.5% and 2.5% to 3.5%, respectively. Comps at LongHorn Steakhouse are however expected to increase 2.0% to 3.0%.

Our Take

Darden posted modest third quarter fiscal 2014 results. Though the bottom line matched the Zacks Consensus Estimate, the top line fell short of our expectations due to lower comps. The company is trying to offset the impact of the challenging environment with a set of initiatives undertaken to boost its business. However, these initiatives will take time to reap benefits. In fact, the company expects its strategic action plan to generate savings of at least $60 million annually beginning fiscal year 2015.

Meanwhile, slower macroeconomic recovery, adverse impact of the Affordable Care Act and faltering consumer confidence are expected to be headwinds for Darden in fiscal 2014.

Darden currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Carrols Restaurant Group, Inc. TAST, Dunkin' Brands Group, Inc. DNKN and Buffalo Wild Wings Inc. BWLD. All these stocks hold a Zacks Rank #2 (Buy).