Ahead of the Bell: Darden

Jefferies analyst cuts Darden rating to "Hold" on weak 2nd-qtr outlook, full-year guidance cut

Associated Press

NEW YORK (AP) -- A Jefferies analyst on Wednesday cut his rating for Darden Restaurants Inc. to "Hold" from "Buy," a day after the company cut its profit prediction for the full year blaming failed promotions and negative publicity generated by its tests to limit health care costs for workers.

Analyst Andy Barish also slashed his price target for the owner of Olive Garden and Red Lobster by $14 to $47. He said that company's current share price is reasonable and that he likes Darden's recent acquisition of the Yard House chain, but said that its sales have flattened despite the company's efforts to boost traffic.

Darden shares fell 21 cents to $47.19 in premarket trading.

"The category remains difficult and the fiscal second quarter is Darden's seasonally weakest quarter, but positive trends across several large public brands indicate that market share gains are possible," Barish wrote in a note to investors. "Unfortunately, Darden's increased focus on affordability does not appear to be resonating."

Darden Chairman and CEO Clarence Otis said Tuesday that the company's promotions didn't resonate with as well with "financially stretched" diners as those of competitors during its fiscal second quarter. He said the disappointing results show the need for bold changes and that Darden would revise its promotional calendars to better fit with the financial realities of diners.

Darden, based in Orlando, Fla., said it expects an adjusted profit from continuing operations of 31 cents or 32 cents per share for its second quarter, which ended Nov. 25. Analysts polled by FactSet had expected earnings of 46 cents per share.

Sterne Agee analyst Lynne Collier on Wednesday backed her "Buy" rating for Darden, but cut her price target by $8 to $55, attributing the company's weak second-quarter guidance to tough economic conditions and promotion-related mistakes. But she said that at this point, the bad news is already reflected in the company's stock price, adding that its dividend should keep the shares from falling much further.

The company is cutting its outlook for its full fiscal 2013 as well, noting that the more downbeat guidance reflects the potential impact of bad publicity. In October, the company had said it was putting more workers on part-time status in a test aimed at limiting costs from President Barack Obama's health care law.

The company projected a fiscal 2013 profit from continuing operations of $3.29 to $3.49 per share, which includes about 8 cents to 10 cents of transaction and closing costs related to the Yard House acquisition. Its previous guidance was for earnings of $3.76 to $3.90 per share. Analysts had expected $3.87 per share.

That guidance is based on expectations of total sales growth of between 7.5 percent and 8.5 percent, down from its previously projected range of 9 percent to 10 percent growth. Based on the company's fiscal 2012 revenue of $8 billion, the new guidance projects fiscal 2013 revenue of $8.6 billion to $8.68 billion. Analysts had expected $8.75 billion.

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