Darden's 2Q EPS Meets, Rev Beats

Zacks

Darden Restaurants Inc. (DRI) posted second-quarter fiscal 2013 earnings from continuing operation of 26 cents per share, in line with the Zacks Consensus Estimate but lower than the year-ago earnings of 41 cents per share. Costs associated with the acquisition of Yard House USA Inc. and the impact of Superstorm Sandy affected the second-quarter’s earnings per share by 5 cents and a penny, respectively.

Total revenue grew 7.0% from the prior-year quarter to $1,960.0 million, which surpassed the Zacks Consensus Estimate of $1,954.0 million. Combined same-store sales (comps) for the company’s three core brands -- Olive Garden, Red Lobster and LongHorn Steakhouse -- dropped 2.7%, while the same for the company's Specialty Restaurant Group nudged up 0.7%. The failure of promotional offers amid a value-sensitive environment primarily affected Darden in the second quarter of 2012.

Operating Highlights

By restaurant concepts, Olive Garden’s sales grew 1.5% year over year to $849.0 million in the second quarter, driven by contributions from 46 net new restaurants offset somewhat by a 3.2% downside in comps.

Sales at Red Lobster decreased 2.1% to $590.0 million as a 2.7% decrease in comps weakened the concept’s performance. However, revenues from 5 net new restaurants provided the partial offset.

At LongHorn Steakhouse, sales were up 7.8% at $275.0 million as 32 net new restaurants contributed to the upside. Comps fell 0.8% in the quarter.

Sales at The Specialty Restaurant Group jumped 76.4% to $241.0 million aided by the addition of 40 Yard House restaurants, a new opening of Yard House unit in October, 3 net new units at The Capital Grille, 5 net new units at Bahama Breeze and 4 net new units at Seasons 52.

While a rise in comps of 0.8% at The Capital Grille and 1.9% at Bahama Breeze helped drive growth at Specialty Restaurant Group, a decline of 1.0% proved to be a drag on the momentum.

Liquidity

Darden ended the quarter with cash and cash equivalents of $61.4 million and long-term debt (less current portion) of $2,503.5 million.

Guidance

Orlando, Florida-based Darden foresees its sales growth for fiscal 2013 in the range of 7.5%—8.5% based on a negative 1.0% to flat blended same-store sales growth estimate for its three core brands. The company expects to open 100 units in fiscal 2013, excluding Yard House.

Darden also expects to earn $3.29–$3.49 per share from continuing operations in fiscal 2013, which includes approximately 8–10 cents of transaction and closing costs associated with the purchase of Yard House USA Inc.

Our Take

Slowdown in comps in three of Darden’s concepts was the key takeaway from Darden’s second quarter earnings results. Moreover, after promising well in the last quarter, Olive Garden underperformed yet again. Red Lobster, too, put up a dismal performance in the quarter.

Along with Olive Garden and Red Lobster, LongHorn Steakhouse, which was a better-placed brand until recently, also delivered negative comps in each month of the quarter confirming the wavering consumer confidence in the U.S.

In order to improve the impact of its unsuccessful promotions, management is bringing about changes in dishes and services. Furthermore, management remains keen on the modification of its promotional calendar and deployment of brand-appropriate affordability to be more consumer-friendly. However, its sustained effect is yet to be seen.

Darden, which competes with Kona Grill Inc. (KONA) and Brinker International Inc. (EAT), currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Underperform recommendation on the stock.

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