Market Overview

Darden Restaurants Earnings Preview: Double-Digit EPS Growth for Q3 Expected

Darden Restaurants (NYSE: DRI) is scheduled to report third-quarter fiscal 2012 results tomorrow, March 23, before the opening bell.

Though revenue has risen in the past four quarters, the company's net income has fallen in each of the past two quarters. The question for investors is what effect will the warmer-than-expected winter have had, as well as the Lenten season beginning in the third quarter this year? And food inflation has begun to moderate year over year, though prices are still high.

Expectations

Analysts predict that Darden Restaurants will report that per-share earnings came to $1.24 for the quarter and that revenue totaled $2.1 billion. In the same quarter of last year, the company posted $1.08 per share and $1.9 billion in sales. That EPS estimate is a nickel more than it was 60 days ago. Note that Darden's EPS have not fallen short of consensus estimates in the past six quarters.

In the second-quarter report, Darden said earnings came to $53.7 million, or $0.40 per share, which was down from the year-ago earnings but in line with expectations. Total revenue increased 6.1% from the prior-year quarter to $1.8 billion, surpassing the consensus estimate of analysts. The company said strong sales growth at the Red Lobster and LongHorn Steakhouse chains offset disappointing sales results at Olive Garden. Olive Garden has since reworked menus and increased promotions to bolster traffic.

See also: Darden Restaurants Reports 28% in FQ2 Net Income

Looking ahead to the current quarter, so far analysts expect to see similar year-over-year growth in both Darden's per-share earnings and its revenues. That EPS estimate has inched up a penny in the past 60 days.

The Company

Orlando-based Darden Restaurants operates more than 1,900 full-service restaurants in the United States and Canada under the Red Lobster, Olive Garden, LongHorn Steakhouse, Capital Grille and other banners. The company was founded in 1968 and it is now an S&P 500 component with a market cap of $6.7 billion.

Competitors include Brinker International (NYSE: EAT) and DineEquity (NYSE: DIN). Both the top and bottom lines at Brinker, operator of Chili's and Maggiano's, fell short of expectations in the most recent quarter. DineEquity, parent of the Appleby's and IHOP chains, posted a fourth-quarter profit, though its margins were squeezed by inflation and labor costs.

See also: DineEquity Posts Q4 Profit

During the three months that ended in February, Darden boosted its outlook for the third quarter, and for the second year in a row it made Fortune's list of the 100 best companies to work for. The company also unveiled a 1.1 megawatt solar panel installation at its corporate headquarters.

Performance

Darden Restaurants has a long-term earnings per share growth forecast of 12.1% and a return on equity of 25.1%. Sales increased 7.0% over the past five years. The P/E and PEG ratios are lower than the industry averages, and the operating margin is a higher than the industry average. Darden has a dividend yield of 3.3%. Analysts on average recommend buying the stock. Their mean price target on the shares is more than 5% higher than the current share price.

The stock is about 16% higher than at the beginning of the year and shares are near the 52-week high. The price has been above than 50-day and 200-day moving averages since early February. Over the past six months, though, the stock has underperformed Brinker International and DineEquity. The stock's performance has been in line with the broader markets.

See also: Bank of America: Darden Earnings Preview

ACTION ITEMS

Bullish: Investors interested in exchange traded funds invested in Darden Restaurants might want to consider the following trades:

  • Rydex S&P Equal Weight Consumer Discretionary (NYSE: RCD) is almost 17% higher year to date.
  • Consumer Discretionary Select Sector SPDR (NYSE: XLY) is about 15% higher year to date.
  • iShares Russell 1000 Growth Index (NYSE: IWF) is more than 14% higher year to date.
  • Vanguard Mid-Cap ETF (NYSE: VO) is more than 13% higher year to date.
Bearish:

Traders may prefer to consider these alternative positions in the same industry:

  • Ruth's Hospitality Group (NASDAQ: RUTH) is up more than 45% year to date.
  • Red Robin Gourmet Burgers (NASDAQ: RRGB) is up more than 33% year to date.
  • PF Chang's China Bistro (NASDAQ: PFCB) is up about 32% year to date.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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