Darden Restaurants Inc.’s (DRI) fiscal fourth quarter earnings of 81 cents per share fell short of the Zacks Consensus Estimate at 88 cents on an adjusted basis, and also recorded a year-over-year drop of 7.0%.

On a reported basis, including loss from discontinued operations, earnings came in at 80 cents per share, down 8.8% year over year. 

Earnings were hit by a $12.7 million pre-tax reduction in sales associated with the correction of its third quarter estimate of gift card redemptions. This non-cash correction reduced net earnings per share from continuing operations by approximately five cents in the fourth quarter.

The company’s full year earnings per share were $2.86 versus $2.65 in the previous year. Total sales from continuing operations in the quarter decreased 5.7% to $1.86 billion, as blended comparable restaurant sales were down 2.3%. Darden Restaurants witnessed its first positive growth in the third quarter of fiscal 2011 after nearly two years.

For the full year, sales from continuing operations were $7.11 billion, representing a year-over-year decline of 1.4%.  

Operating Highlights

By restaurant concepts, Olive Garden’s sales dipped 4.8% year over year to $848.0 million due to a 1.5% decline in comps, somewhat offset by the opening of 32 new restaurants. 

Sales at Red Lobster fell 9.6% to $663.0 million, largely due to a 4.6% decrease in comps, partially offset by the addition of four net new restaurants. 

At LongHorn Steakhouse, sales were down 2.5% at $233.0 million, although the segment experienced 1.8% growth in comps and saw a net opening of 10 new restaurants in the quarter.

Sales at The Capital Grille increased 9.4% to $64 million, driven by the addition of three net new restaurants and a modest 4.7% rise in comps. 

At Bahama Breeze, sales declined 2.9% to $38 million, despite the addition of one net new restaurant and a 1.2% upside in comps.

Financial Position

Darden Restaurants ended fiscal 2010 with cash and cash equivalents of $248.8 million, total long-term debt, net of current portion, of $1,408.7 million and shareholders’ equity of $1,894.0 million.

Share Repurchase and Dividend Update
 
Darden Restaurants purchased over 1.5 million shares of its common stock during the fourth quarter, bringing the total number of shares it repurchased during the year to nearly 2.0 million, and hiked its quarterly dividend by 4.8% to 32 cents.
 
Outlook

For fiscal 2011, Darden Restaurants expects same-store sales growth at three of its large casual dining brands (Olive Garden, Red Lobster and LongHorn Steakhouse) to remain in the range of 2.0% to 3.0% year over year. Darden Restaurants expects its total year-over-year sales growth to remain in the range of 5.5% to 6.5% for fiscal 2011. Coupled with continued margin improvement, this translates into earnings per share growth of 14% to 17%. 

Recommendation 

Restaurants in the casual dining segment are grappling with sagging comps and waning traffic as cash strapped consumers shift to lower-priced dining options or eating at home. The month-to-month fluctuation in sales indicates a cautious spending trend. However, with an improving trend in the economy, three out of five of Darden Restaurants’ brands registered increased comparable-restaurant sales. 

We look forward to a positive contribution from Darden Restaurants due to its strong value proposition, menu improvements, proven management team, ability to contain costs and excellent unit-level execution with differentiated brands.

On the other hand, we are a bit concerned about the still-high unemployment level and an oversupply of casual dining restaurants in the U.S. 

We currently have a short-term Hold recommendation on Darden Restaurants.

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