Earnings Scorecard: Darden

On September 21, Darden Restaurants Inc. (DRI) reported its first quarter fiscal 2011 earnings of 80 cents per share, which were well ahead of the Zacks Consensus Estimate of 77 cents and up 19% year over year. Given below is our report on the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for short-term and long-term outlook for the stock.

Earnings Report Flashback

First quarter fiscal 2011 total revenue spiked 4.2% from the prior-year quarter to $1.81 billion, but was marginally short of the Zacks Consensus Estimate of $1.82 billion. Combined same-store sales for the company’s three core brands, namely Olive Garden, Red Lobster and LongHorn Steakhouse, rose 1.1% and fared better than the zero expected growth as per the Knapp-Track benchmark of U.S. same-restaurant sales.

(Read our full coverage on this earnings report: Darden Reports Mixed 1Q Results)

Earnings Estimate Revisions: Overview

Following the release of Darden Restaurant’s first quarter results, estimate revision trends among the analysts depict a longer-term positive outlook. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

Over the last 7 days, a positive trend is noticed for fiscal 2011 and 2012, with earnings estimates being increased by 11 and 8 out of 26 and 22 analysts, respectively. On the other hand, downward revision in estimate for fiscal 2011 was made by one analyst. None of the analysts lowered the estimates for fiscal 2012. However, the analysts have a bearish outlook for the second and third quarter of 2011 as 6 out of 26 analysts raised the estimates while 7 and 12 analysts, respectively, decreased the same.

The trend was almost similar over the last 30 days, with only pessimistic outlook observed for the third quarter of fiscal 2011. Fiscal 2011 and 2012 estimates for Darden Restaurants were increased by most of the analysts and downward revisions have been comparatively fewer. This indicates a positive bias of the analysts toward the company.

The analysts, by and large, are mainly impressed with the reiteration of management’s bullish guidance provided for fiscal 2011. The company said that same-store sales at its core Red Lobster, Olive Garden and LongHorn Steakhouse brands are expected to grow 2%–3%, with a total revenue growth of 5.5%–6.5%.

Darden Restaurants enjoys a unique position owing to its strong value proposition, menu improvements, massive advertising and excellent unit-level execution with differentiated brands. It is one of the few casual dining chains that have expanded in the sluggish economic environment, introducing new concepts to enhance top-line growth.

For the last five years, Darden has kept its restaurant operating cash flow margins stable at 22%–23% despite the recent economic downturn. Additionally, the cost environment is expected to remain stable in fiscal 2011. Darden continues to see incremental year-over-year benefits in fiscal 2011 and 2012 from its major cost-saving efforts, including supply-chain automation and facilities’ management centralization.

However, over the last 30-day period, the analysts’ outlook remains less favorable for the second quarter, with 8 out of 26 analysts increasing their estimates and 6 decreasing the same. Estimates for the third quarter were raised by 5 analysts while 10 analysts lowered the same. The analysts’ remain cautious about the performance of Red Lobster. Two notable promotions, American Seafood Adventure and Crabfest failed to drive meaningful traffic in the first quarter. Although Olive Garden bounced back in the quarter after a decline in fourth quarter fiscal 2010, the rebound was completely promotion driven. Moreover, while the analysts remain impressed with faster unit growth by LongHorn Steakhouse, they expect the return on investment to be lower in the short term.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Darden Restaurants has been moderate over the last 7 days. Following the release of first quarter results, estimate for fiscal 2011 was upped by 2 cents. Estimates for fiscal 2012 as well as for second quarter 2011 have been raised by one penny while estimate for third quarter fiscal 2011 was decreased by the same amount.

Our Recommendation

Although we prefer Darden Restaurants, the continuous decline in same-store sales in Red Lobster, increased dependence on core brands such as Olive Garden and Red Lobster that are approaching saturation, the recent Gulf oil spill that is affecting Darden’s supply and demand for sea food, and stiff competition are among the host of factors that could pose a threat to its growth.

Currently, we have a Zacks #3 Rank (short-term Hold recommendation) on the shares of Darden Restaurants. We also reiterate our long-term Neutral rating.

DARDEN RESTRNT (DRI): Free Stock Analysis Report

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