Darden Misses 4Q Earnings, Rev in Line

Zacks

Darden Restaurants Inc. (DRI) posted fourth-quarter fiscal 2013 earnings from continuing operations of $1.01 per share, missing the Zacks Consensus Estimate by nearly 2%. Quarterly earnings were also down 12% from the year-ago level. Higher operating costs pressurized the earnings during the quarter.

In fiscal 2013, earnings per share from continuing operations were $3.14 which missed the Zacks Consensus Estimate by roughly 0.6% and the comparable year-ago level by 12%.  

Total revenues grew 11.3% year over year to $2.3 billion, in line with the Zacks Consensus Estimate. Quarterly revenues were driven by higher same-store sales (comps) growth, new unit openings and higher sales gain from the company’s previously acquired Yard House restaurants.

In fiscal 2013, revenues increased 6.9% year over year to $8.6 billion which was ahead of the Zacks Consensus Estimate by 1.2%. 

Operational Highlights

The company owns and operates restaurant chains such as Red Lobster, Olive Garden, LongHorn Steakhouse and The Specialty Restaurant Group.

Combined comps at the company’s three core brands – Olive Garden, Red Lobster and LongHorn Steakhouse – were up 2.2% while that of Darden’s Specialty Restaurant Group were up 2.3%, driven by higher traffic.

Olive Garden’s sales were up 5.3% year over year to $952 million in the fourth quarter, buoyed by contributions from 36 new units and a 1.1% increase in U.S. comps.

Sales at Red Lobster increased 3.3% to $703 million due to a 3.2% increase in U.S. comps and revenue gains from the segment’s one new unit.

At LongHorn Steakhouse, sales were up 14.0% to $339 million as 44 net new restaurants contributed to the upside. A 3.5% increase in the U.S. comps also helped the segment’s sales growth.

Sales at The Specialty Restaurant Group jumped 64.7% to $295 million, backed by a more significant sales gain from 40 Yard House restaurants, four newly opened units and higher comps at The Capital Grille, Eddie V's and Seasons 52 restaurants. However, negative comps of 1.7% at Bahama Breeze proved to be a drag.

Dividend

The company also announced a 10.7% hike in its quarterly cash dividend rate. The company will now pay a quarterly dividend of 55 cents per share, a nickel above the prior-quarter dividend of 50 cents per share. The increased dividend will be paid on Aug 1, 2013 to stockholders of record on Jul 10.

Liquidity

Darden ended the quarter with cash and cash equivalents of $88.2 million versus $103.9 million in the previous quarter. Long-term debt (less current portion) remained nearly flat year-over-year at $2.5 billion in the fourth quarter.

Guidance

Darden expects the business environment for fiscal 2014 to be as sluggish as fiscal 2013. According to the company, consumers have become extremely value-sensitive. The payroll tax increase and the spike in gasoline prices have compelled the cash-strapped consumers to dine out less.

Orlando, Fla.-based Darden foresees its sales growth for fiscal 2014 in the range of 6% - 8% (inclusive of the additional quarter of sales from Yard House) based on a flat to up 2% blended same-store sales growth for its three core brands. Sales in fiscal 2014 are expected to get a boost from the company’s Yard House restaurants and new unit openings.

In fiscal 2014, the company intends to open 80 restaurants, 24% lower than the year-ago period owing to the decline in the number of new Olive Garden restaurant openings.

Finally, the company expects its earnings per share to decrease by 3% - 5% from the prior year due to the tough year-over-year comparison, higher cost incurred due to the implementation of Affordable Care Act, partly offset by the lower costs associated with the Yard House acquisition.

Our Take

Although Darden’s earnings missed estimates during the quarter, it seems the company is back on track with higher revenues, unit expansion and positive comps growth at all of its restaurants. The company’s Red Lobster brand is also gaining traction after a few weak quarters. However, macroeconomic tension, adverse impact from the Affordable Care Act and faltering consumer confidence are expected to be headwinds for fiscal 2014. Moreover, although Darden took a set of initiatives to improve its business, its sustained effect is yet to be seen.

Darden currently carries a Zacks Rank #3 (Hold). Other stocks in the restaurant industry that are currently performing well include CEC Entertainment Inc. (CEC), AFC Enterprises Inc. (AFCE) and Bloomin' Brands, Inc. (BLMN). While CEC Entertainment carries a Zacks Rank #1 (Strong Buy), AFC Enterprises and Bloomin' Brands both carry a Zacks Rank #2 (Buy).

Read the Full Research Report on DRI

Read the Full Research Report on BLMN

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Read the Full Research Report on AFCE

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