We remain Neutral on Darden Restaurants Inc. (DRI). Although the Orlando, Fla-based restaurateur’s fiscal first quarter 2014 results failed to impress us, we have faith in the company’s long term fundamentals
Why the Reiteration?
On Sep 20, 2013, Darden posted fiscal first-quarter 2014 earnings of 53 cents per share, which missed the Zacks Consensus Estimate of 69 cents by nearly 23.2%. Quarterly earnings were also down 37.6% from the year-ago level. Margin shortfall and soft revenues pressurized earnings during the quarter.
Although its revenues of $2.16 billion grew 6.1% year over year, it fell shy of the Zacks Consensus Estimate of $2.18 billion. Underperformance in two of its core brands -- Red Lobster and Olive Garden -- led to the soft sales in the quarter. Overall comps were sluggish in the quarter. Olive Garden and Red Lobster declined 4.0% and 5.2%, respectively in the quarter.
Darden expects food and beverage expenses to rise in fiscal 2014. Seafood inflation, which was insignificant in the first quarter, will likely see a double-digit increase in the remaining nine months of the fiscal year. Energy costs are expected to be slightly higher on a year-over-year basis, primarily due to increases in the price of natural gas. Overall, the company raised its commodity cost inflation guidance by 50 bps from its prior expectation. Higher costs along with increased expenses on promotions and discounting pricing strategy will keep margins under pressure.
Despite the unenthusiastic first-quarter results, we are positive on Darden’s diversified brand portfolio that provides sales diversification and cost synergies. Also, Darden’s Specialty Restaurant Group brand has evolved over the last couple of quarters. Ongoing remodeling initiatives can drive sales significantly over the long term.
In order to boost its profits and gain financial flexibility amid a sluggish sales environment, Darden plans to reduce its annualized operating support spending by approximately $50 million through layoffs and lower program spending. Of the anticipated gains, $25 million will be realized in fiscal 2014. Lastly, increasing shareholder value, irrespective of economic ups and downs, is another tailwind for the stock.
Darden currently carries a Zacks Rank #3 (Hold). Others players in the same industry, which look attractive at current levels include AFC Enterprises Inc. (AFCE), Cracker Barrel Old Country Store, Inc. (CBRL) and Domino's Pizza, Inc. (DPZ), all carrying a Zacks Rank #2 (Buy).