Darden Restaurants Misses on Q4 Earnings - Analyst Blog

Restaurateur Darden Restaurants Inc. DRI posted fourth quarter and fiscal 2014 results. Earnings from continued and discontinued operations of 65 cents per share declined 35.6% year over year.

Darden Restaurants' adjusted earnings from continued operations of 55 cents missed the Zacks Consensus Estimate of 93 cents by 41.0%. However, investors should note that the consensus figure includes earnings from Red Lobster, which has been classified by the company as discontinued operations. Including continued and discontinued operations, the company's adjusted earnings stood at 84 cents, still short of the consensus mark.

Higher costs and expenses and weak performance at its Olive Garden Chain hurt earnings.

Adjusted earnings exclude the impact of costs of 19 cents associated with its strategic action plan announced in Dec 2013.

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 in Dec 2013. The company recently announced a definitive agreement to divest Red Lobster to private equity firm, Golden Gate Capital, for $2.1 billion in cash. The sale of the business is expected to be completed in the fiscal first quarter of 2015. (Read More: Darden to Sell Off Red Lobster). As a result of the pending sale of Red Lobster, operating results for Red Lobster were classified as discontinued operations. As per the plan, the company also intends to lower unit expansion, which will automatically reduce capital spending by at least $100 million on an annual basis.

Revenues

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

Total sales from continuing and discontinued operations amounted to $2.32 billion, up 0.86% year over year.  Sales from continuing operations of $1.65 billion increased 3.6% year over year due to the operation of 69 net new restaurants and improved comps at LongHorn Steakhouse and the Specialty Restaurants Group, partially offset by comps decline at Olive Garden. However, sales missed the Zacks Consensus Estimate of $2.29 billion by 27.8%. The Zacks figure however takes into account revenues from Red Lobster, which has been classified by the company as discontinued operations.

Comps at LongHorn Steakhouse increased 2.4%, worse than growth of 3.5% in the year-ago quarter but better than comps growth of 0.3% in the prior quarter. Comps at Olive Garden declined 3.5% compared to growth of 1.1% in the year-ago quarter but better than a decline of 5.4% in the prior quarter.

Red Lobster comps declined 5.6% compared to growth of 3.2% in fiscal fourth quarter 2013 and 8.8% in the prior quarter. After posting a decline of 0.7% in the prior quarter, Specialty Restaurant Group posted growth of 2.0% in the reported quarter, marginally down from the year–ago comps of 2.1%.

Sales at Olive Garden declined 2.7% year over year to $926.0 million in fiscal fourth quarter 2014 due to a decline in comps, partially offset by revenues generated from 9 net new restaurants. At LongHorn Steakhouse, sales were up 10.8% to $376.0 million. As many as 34 net new restaurants and positive comps contributed to the upside.

Sales at The Specialty Restaurant Group increased 15.9% to $342.0 million, thanks to comps growth of 4.0% at The Capital Grille, 4.1% at Bahama Breeze, 0.8% at Yard House, and 0.3% at Eddie, partially offset by comps decline of 1.6% at Seasons 52. The upside could be attributed to higher revenues from 5 new The Capital Grille restaurants, 4 Bahama Breeze restaurants, 7 Seasons 52 restaurants, 3 Eddie V's and 8 Yard House restaurants.

Sales at Red Lobster decreased 5.6% to $664.0 million due to a decline in comps.

Operational Highlights

Total costs and expenses (excluding asset impairment charges) during the reported quarter were $1.60 billion, up 6.1% year over year mainly due to higher cost of sales and selling, general and administrative expenses.

Full Year Highlights

Fiscal 2014 earnings per share of $2.15 declined 31.3% year over year. However, earnings from continuing operations of $1.70 missed the Zacks Consensus Estimate of $2.45 (which includes earnings from Red Lobster) by 30.6%. Total sales from continuing and discontinued operations of $8.76 billion were up 2.4% year over year. Sales from continuing operations of $1.65 billion increased 3.6% year over year.

Our Take

Darden will complete the divestiture of one of its underperforming segments in fiscal first quarter 2015. The divestiture will help it to focus on its more profitable brands like LongHorn Steakhouse and Capital Grille. Moreover, in order to make the business more profitable, the company is working on its comprehensive strategic plan. However, the costs associated with the strategic action plan are hurting its bottom line.

Other Stocks to Consider

Darden currently has a Zacks Rank #4 (Sell). Some better-ranked stocks worth considering in the restaurant industry include Buffalo Wild Wings Inc. BWLD, Burger King Worldwide, Inc. BKW and Carrols Restaurant Group, Inc. TAST. While Buffalo Wild Wings sports a Zacks Rank #1 (Strong Buy), Burger King Worldwide and Carrols Restaurant Group carry a Zacks Rank #2 (Buy).