Darden Restaurants Inc.’s (DRI) second quarter 2011 earnings of 55 cents per share inched past the Zacks Consensus Estimate of 54 cents and grew 26.0% year over year.

Total revenue spiked 5.2% from the prior-year quarter to $1,726.2 million, but was below the Zacks Consensus Estimate of $1,732.0 million. Combined same store sales for the company’s three core brands Olive Garden, Red Lobster and LongHorn Steakhouse rose 1.4% and fared better than the 1% expected growth as per the Knapp-Track benchmark of U.S. same-restaurant sales.

Operating Highlights

By restaurant concepts, Olive Garden’s sales upped 5.8% year over year to $828.0 million, driven by a 2.0% rise in comps and revenues from 33 new restaurants.

Sales at Red Lobster fell 1.1% to $556.0 million largely due to a 1.6% decline in comps, partially offset by revenues from two net new restaurants.

At LongHorn Steakhouse, sales were up 12.4% at $224.0 million as the segment experienced a 6.8% growth in comps and revenues from 17 net new restaurants in the quarter.

Sales at The Specialty Restaurant Groups increased 18.9% to $115 million, driven by comps growth of 5.6% at The Capital Grille, 3.2% at Bahama Breeze and 3.8% at Seasons 52. The growth in revenues was also attributable to the addition of four net new restaurants at The Capital Grille, seven new restaurants at Seasons 52 and one new restaurant at Bahama Breeze.

Financial Position

Darden ended second-quarter 2011 with cash and cash equivalents of $52.9 million and  long-term debt (less current portion) of $1408.8 million. The company purchased over 1.6 million shares of its common stock during the second quarter and declared a quarterly dividend of 32 cents per share. The board of directors approved an additional share repurchase authorization totaling 25 million shares.

Outlook

Darden reaffirmed its 2011 earnings per share growth target in the range of 14% to 17%, based on overall sales growth expectation in the range of 5.5% to 6.5%, about 2% blended same store sales growth for Olive Garden, Red Lobster and LongHorn Steakhouse and 70 to 75 net new restaurant openings in fiscal 2011.

Our Take

Darden boasts of a unique position based on its strong value proposition, menu improvements, excellent unit-level execution with differentiated brands and a balanced portfolio, which provides greater diversification in sales and cost synergies. The company is also one of the few casual dining operators to expand during the sluggish economic environment and introduce new concepts to enhance top-line growth.

We also remain optimistic about the recent development agreement of the company with the food service franchise operator, Americana Group of Kuwait to enter the Middle East market. As per the deal, Americana Group will set up 60 restaurants in Bahrain, Egypt, Kuwait, Lebanon, Qatar, Saudi Arabia and United Arab Emirates over the next five years. 

On the flip side, underperformance in same store sales growth in Red Lobster, huge dependence on core brands such as Olive Garden and Red Lobster that are approaching saturation, large debt balance and stiff competition are factors that will likely hinder the company’s growth in the coming quarters.

Hence, Darden currently retains a Zacks #3 Rank (short-term Hold recommendation). We also reiterate our long-term Neutral rating.  Darden’s primary competitor Dine Equity Inc. (DIN) will release its fourth-quarter 2010 earnings on February 28, 2011.

 
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