Darden Restaurants Shares at New Highs Following Earnings
Darden Restaurants, Inc. (NYSE: DRI), which operates Red Lobster, Olive Garden and LongHorn Steakhouse restaurant chains, announced first quarter results for the three months ended August 26, 2012 showing earnings per share from continuing operations of $0.85, up 9 percent from the same period last year, on revenues of $2.03 billion, up 4.8 percent. The company also announced that it will pay a quarterly dividend of 0.50 cents per share.
During the first quarter, combined sales at restaurants open for at least one year at Darden's three major chains were down 0.3 percent. Sales increased by 3.6 percent at LongHorn Steakhouse, rose 0.3 percent at Olive Garden but declined by 2.6 percent at Red Lobster. Same-restaurant sales in the Specialty Restaurant Group increased by 2.2 percent.
Although sales were down at Darden's flagship Red Lobster chain, profits were higher as the cost of seafood declined. Looking at overall group profitability, lower seafood prices moderated “the significant spike in the cost of beef,” said Clarence Otis, chairman and CEO of Darden. “Olive Garden had meaningful sales and margin improvement and LongHorn Steakhouse and the Specialty Restaurant Group continued to have good sales momentum.”
Darden continued to expand its restaurant chains during the quarter. Olive Garden had 40 new restaurants compared to the same quarter last year while Red Lobster opened six new venues and LongHorn Steakhouse added 34 new locations.
Darden grew its specialty restaurant group through the acquisition of 11 Eddie V's restaurants, offering fresh seafood, prime steaks and live music in an upscale atmosphere, and adding new venues to the Capital Grille, Seasons 52 and Bahama Breeze chains.
On August 29, at the start of the second quarter, Darden acquired Yard House USA, which features a wide range of beers, American cuisine and classic rock music. Yard House currently operates 40 restaurants but management said during a conference call that this could be expanded to 150-200 locations over time.
Looking ahead to the rest of the fiscal year ending August 2013, Darden expects one to two percent combined sales growth for its three major restaurant chains, Red Lobster, Olive Garden and LongHorn Steakhouse. The company plans to open a net total of 100-110 new restaurants during the year to August 2013, excluding the acquisition of Yard House. Full-year revenue growth for the Darden group, including Yard House, is expected to be nine to ten percent while fully diluted earnings per share from continuing operations should be in the range of five to nine percent.
Management discussed marketing plans on its conference call. A new advertising campaign for Olive Garden will be tested in the second quarter and this will be linked to higher menu prices. On the other hand, Red Lobster will be introducing a new menu with more items priced under $15 and offering more non-seafood dishes. In addition, a restaurant remodeling program will be accelerated in the second half of the year to August 2013.
Analysts on the conference call with management asked about higher costs for beef and other commodities given the impact of this year's drought on feed prices. The company said that it has already locked in about 80 percent of its commodity costs for the rest of 2012 and about 27 percent of its commodity costs for the remainder of the year to August 2013. Management anticipates food inflation will be in a range of 0.5 percent to 1.5 percent for the year to August 2013 compared to an inflation rate of 0.5 percent during the first quarter. The company expects that seafood costs will continue to decline during the second quarter which will help to offset higher operating costs at LongHorn Steakhouse due to rising beef prices.
In addition to announcing a quarterly dividend of 50 cents, the company said that it had repurchased one million shares during the first quarter. 15.5 million shares remain in the current repurchase authorization.
Darden's share price gapped higher on today's first quarter result, trading as high as $57.93, a new all-time high.
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