Why Darden expects flat same-restaurant sales for Olive Garden

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Overview: Starboard Value's activist position at Darden (Part 6 of 7)

(Continued from Part 5)

Flat same-restaurant sales expected for Olive Garden

Activist investor Starboard Value launched a proxy fight to gain control over the board of Darden Restaurants (DRI), after opposing the sale of the company’s Red Lobster seafood chain to private equity company Golden Gate Capital. The activist fund currently owns an ~8.8% stake in the restaurant company.

With the recent completion of the debt retirement, Darden affirmed its previously announced fiscal 2015 outlook and provided quarterly expectations for fiscal 2015 that reflect the benefits and other factors associated with the tender offer, the accelerated stock buyback (or ASB) program, and the sale of its Red Lobster business, which was completed on July 28. In fiscal 2015, Darden expects that the ASB program will benefit diluted net earnings per share (or EPS) by ~$0.01 in the second quarter, ~$0.07 in the third quarter, and ~$0.08 in the fourth quarter. The annualized benefit to diluted net EPS in fiscal 2015 is expected to be ~$0.12.

The company said fiscal 2015 U.S. same-restaurant sales growth for Olive Garden, LongHorn Steakhouse, and the specialty restaurants will be flat to +1%, +1% to +2%, and ~+2%, respectively. It added that current earnings expectations for the year also reflect the opening of ~37 net new restaurants. It said in its annual report that t otal sales from continuing operations in fiscal 2015 are expected to increase between 5%–7%, including the impact of the 53rd week in fiscal 2015.

1Q15 EPS outlook below estimates

Darden also provided its annual diluted EPS outlook for fiscal 2015, which is $1.81–$1.90 for earnings from continuing operations. On an adjusted basis, the company expects diluted net EPS from continuing operations of $2.22–$0.30 for the year. The 1Q15 EPS outlook of $0.28–$0.30 came below analyst estimates.

For fiscal 2015, Darden expects to continue its Olive Garden “brand renaissance,” new restaurant growth at its other brands, primarily driven by LongHorn, implementation of a new management incentive plan that directly emphasizes same-restaurant sales, free cash flow, and relative total shareholder return, continuation of the focus on restaurant support platform costs, and improvement on capital allocation discipline. Last year, the company outlined plans for cost reduction that are expected to result in savings of at least $60 million annually beginning in its fiscal year 2015. It also said it will lower Capex by suspending new unit growth at Olive Garden and limiting new unit growth at LongHorn Steakhouse, with new unit growth at the specialty restaurant group continuing at a modest rate below 2013 levels.

Last year, the company attracted activist interest because its shares were undervalued. It was lagging behind peers including Cheesecake Factory (or CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT), and Bloomin’ Brands (or BLMN). Darden is also a component of the iShares Select Dividend ETF (DVY) and the Consumer Discretionary Select Sector SPDR Fund (XLY).

Continue to Part 7

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