On May 1, 2014, we issued an updated research report on Darden Restaurants, Inc. (DRI).
On Mar 21, this casual dining restaurant reported soft fiscal third quarter results with earnings matching the Zacks Consensus Estimate and revenues falling short of the same. However, the company retained its outlook for 2014.
Darden’s adjusted earnings of 82 cents per share declined 19.6% year over year owing to lower sales and higher direct costs due to inclement weather and costs associated with its strategic action plan announced in Dec 2013.
We are encouraged by Darden’s comprehensive restructuring plan, which calls for a possible spin-off of its lackluster Red Lobster segment. The plan also includes lesser number of unit openings and some other cost saving initiatives. The company intends to use the surplus cash for share repurchases and dividend payments.
Total revenue fell 1.1% year over year to $2.23 billion due to sluggish same-restaurant sales (comps). Comps were weak during the quarter due to inclement weather that hurt customer visits and the adverse effect of a shift in the Thanksgiving holiday week.
Estimates for this Zacks Rank #3 (Hold) company mostly moved downwards in response to the sluggish quarterly results. The Zacks Consensus Estimate for fiscal 2014 and 2015 decreased 0.4% each over the last 30 days.
Like other restaurant chains, Darden is also facing commodity inflation headwinds. The company expects commodity inflation in the range of 2.5% to 3.0% in fiscal 2014 due to higher shrimp and beef costs.
Despite sluggish results, the company retained its outlook for 2014 hoping that the impact of inclement weather and other challenges would subside in the third quarter. Moreover, it expects its cost management initiatives to improve profits.
Also, the company is implementing a set of initiatives at Olive Garden under its brand renaissance plan. These initiatives include simplifying kitchen systems, developing new core menu items and investing in the Tuscan farmhouse remodel program. We expect the revamped restaurants to contribute to the sales growth, going forward.
Darden Restaurants presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include Arcos Dorados Holdings Inc. Cla (ARCO), Buffalo Wild Wings Inc. (BWLD) and Burger King Worldwide, Inc. (BKW). All these stocks carry a Zacks Rank #2 (Buy).