Share of Darden Restaurants (DRI: Charts, News, Offers) – the parent company of Red Lobster, Olive Garden and Longhorn Steakhouse – have been stuck in limbo over the past year, after poor earnings last quarter sunk recovery hopes at the end of September. At the end of its first fiscal quarter, Darden Restaurants reported a profit of $106.6 million, or 78 cents per share, a 5.8% decrease from the $113.1 million, or 80 cents per share, it reported a year earlier. Analysts had been expecting 87 cents per share. Revenue rose 7.5% to $1.94 billion, exceeding the analyst forecast of $1.93 billion. Darden’s miss is particularly unnerving, since the company has traditionally outperformed its restaurant industry peers, due to widely used promotions and discounts feeding a higher-volume lower-margin business model.
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The company blamed higher energy and commodity costs, poor performance at Olive Garden, Hurricane Irene and a sluggish economy as the main factors for the wide miss. The company’s same-store sales in the United States increased 2.8% over the prior year quarter, with a 10.7% increase at Red Lobster and a 4.8% gain at Longhorn Steakhouse. However, these gains were offset by a disappointing 2.9% decline at Olive Garden. Olive Garden’s decline continued to disappoint investors, who have watched the Italian-based chain decline for three consecutive quarters. Darden claimed that Hurricane Irene caused an adverse impact of 0.8% in August same store sales, and an average of 0.2-0.3% for the first quarter. Despite coming in under analysts’ forecasts, the company has reiterated its guidance for an average increase of 3% same store sales for the rest of fiscal 2012.
Darden has been attempting to offset rising costs by increasing beverage costs by 17%, however, gross margins still slipped from 24.4% to 22.4%. The company also raised prices by 2-3% on its food products, but customers were quick to order lower-priced items, or order less altogether. “Consumers still want the dining out experience,” stated CFO Brad Richmond, “but they are choosing to reduce their check average more than we anticipated by ordering fewer appetizers, drinks and desserts.”
Darden has stated that it plans to revive Olive Garden’s performance by offering more promotions, such as its annual never-ending past bowl, but investor reaction has been tepid at best. Darden also intends to renovate its Olive Garden locations, an aesthetic move that helped increase Red Lobster’s restaurant volume recently. The company also intends to lower Olive Garden’s prices further in order to capture a lower-end market than Red Lobster and Longhorn Steakhouse.”The fundamental strategic challenge we’ve faced in the near-term is how to address the growing need for affordability demanded by our guests,” stated COO Drew Madsen, “while also protecting our margins given significant commodity cost inflation.”
Darden has also gained some free publicity by announcing that it was significantly reducing the calories and sodium content of the menu items of its primary chains, as well as offer healthier options for children. Darden signed a widely publicized partnership with First Lady Michelle Obama’s “Let’s Move” initiative to end childhood obesity. While this hardly means that Darden restaurants will soar again overnight, investors would do well to remember the remarkable turnaround McDonald’s (MCD: Charts, News, Offers) staged after reinventing itself as a ‘healthy” fast food restaurant.
Shares of Darden have remained unattractive to everyday investors, along with casual dining peers Brinker International (EAT: Charts, News, Offers), DineEquity Inc. (DIN: Charts, News, Offers), Cheesecake Factory (CAKE: Charts, News, Offers) and BJ’s Restaurant (BJRI: Charts, News, Offers) – while fast food restaurants, such as McDonald’s and Yum! Brands (YUM: Charts, News, Offers) have become market darlings. However, Darden should prove to be an attractive choice for value and income investors, due to its trailing P/E of 13.5 – the cheapest of its comparable peers – and its quarterly dividend of 43 cents per share (a 3.76% yield), which the company has steadily raised since its 1995 IPO.
Other News About DRI
Fitch Rates Darden’s Proposed $350MM Notes ‘BBB’; Outlook Stable
Darden sells more notes to raise capital.
Darden’s profit off amid struggles at Olive Garden
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
