Market Overview

Darden Restaurants Posts FQ3 Beat on Milder Winter, Expense Control

Darden Restaurants (NYSE: DRI) presented above-estimates results for the third quarter of its fiscal 2012 year on Friday, helped by a milder winter, an earlier transition to the Lent season and continued expense discipline. Commodity costs that inflated at a reduced rate this year also assisted the company's bottom line.

The Olive Garden and Red Lobster parent company reported diluted net earnings of $1.25, and declared $0.43 dividend, per share. Reported EPS for the third quarter represented a 16 percent over the $10.8 diluted earnings in the same quarter last year. EPS was one penny above analyst estimates. Its net earnings of $164.1 million were up 8 percent on last year's third quarter. Third quarter total sales came in at $2.16 billion, which was a 9.3 percent increase from the same quarter last year. Analyst had expected $2.14 billion for the quarter.

The company noted that the increase reflected same-restaurant sales growth across its chains and specialty restaurants, as well as the addition of new restaurants under operation. The company's Red Lobster, Olive Garden and LongHorn Steakhouse operations posted a combined same-restaurant sales growth of 4.1 percent for Q3, whereas its Specialty Restaurant Group, including names such as Capital Grill, Bahama Breeze, posted 5.8 percent improvement in same-restaurant sales. In addition, the Specialty Restaurant Group also saw an increase of units under operation, which accounted further revenue growth. The rest of the industry, Darden cites a Knapp-Track benchmark report, is estimated to have posted 2.6 percent in same-restaurant growth.

Clarence Otis, Darden's Chairman and CEO, credited a tempering of food cost inflation and favorable weather as helping the company's underlying business strength. The company said the less-severe winter contributed 2% growth in Olive Garden, Red Lobster and LongHorn Steakhouse restaurant sales during the quarter. The earlier shift into the Lenten Season also added 60 basis points of growth to the company's overall operations. However, this earlier shift is expected to hurt the company's fourth quarter.

The increase in operating margins was largely due to the company's strong execution in reducing labor, restaurant and SG&A expenses in order to offset higher food and beverage costs and depreciation expenses. The exclusion to this was the Red Lobster's chain, where savings were offset by cost increases.

The company's board of directors declared a cash dividend of $0.43 per share on outstanding shares, payable on May 1, 2012. The company repurchased a further 1.8 million shares in the quarter reported. A further 16.9 shares remain authorized for repurchase going forward.

Looking forward, company expects its continuing operations to grow between 4 to 7 percent, and expects to add approximately 85 to 90 net new restaurants for fiscal 2012, bringing total sales growth to between 7 and 7.5 percent. The company also reiterated its commitment to boost its EBIT by 200 basis points to around 12 percent by 2016. The company's Chairman and CEO noted that despite the volatility of the industry, Darden had significant opportunities through 2016, including the addition of as much as $4 billion in revenues, $2 to $3 in EPS, and a return of $2,6 to $3.3 billion of returned capital to shareholders through share repurchases. The company also vowed to boost its cost cutting initiative by $180 million in 2016, from the $50 million since fiscal 2008.

That said, the company has cautioned about macro outlooks that will adversely affect the volatile restaurant industry. CEO Clarence Otis pointed that improvement has been definitive but slow accross industries when you exclude weather data. Volatile growth trends are directly affected by economic headline news sucha s jobs data, geopolitical developments and especially cost inflation in food and fuel.

The company's media marketing reflects current affordability-sensitive realities as it transitions from a story- and dish-based idea to a broader platform focusing on price, such as “never-ending pasta bowl” and “three-course italian meal” that focus on brand-appropriate price points.

Shares have just opened down nearly 3 percent on Thursday's $51.83 a share.

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