Darden Restaurants Inc. (DRI) posted third quarter 2011 earnings of $1.08 per share, beating the Zacks Consensus Estimate of $1.05 and showing a 13.7% growth year over year.   

Total revenue spiked 5.5% from the prior-year quarter to $1,976.8 million and also surpassed the Zacks Consensus Estimate of $1,969.0 million. Combined same store sales for the company’s three core brands, Olive Garden, Red Lobster and LongHorn Steakhouse, rose 0.9% and fared better than the 0.1% expected growth as per the Knapp-Track benchmark of U.S. same-restaurant sales. LongHorn Steakhouse led the growth as expected despite a severe winter and shift in Lenten season.

Operating Highlights

By restaurant concepts, Olive Garden’s sales upped 4.3% year over year to $907.0 million, driven by revenues from 33 net new restaurants partially offset by flat comps growth.

Sales at Red Lobster nudged up 1.2% to $663.0 million attributable to revenues from two net new restaurants as well as a 0.1% rise in comps.

At LongHorn Steakhouse, sales were up 12.6% at $268.0 million as the segment experienced a growth of 6.1% in comps. Moreover, revenues from 21 net new restaurants in the quarter also contributed to the growth.

Sales at The Specialty Restaurant Groups increased 25.0% to $139.0 million, driven by comps growth of 8.4% at The Capital Grille, 3.4% at Bahama Breeze and 4.2% at Seasons 52. The growth in revenues also came from the addition of four new restaurants at The Capital Grille, six new restaurants at Seasons 52 and one new restaurant at Bahama Breeze.

Financial Position

Darden ended third-quarter 2011 with cash and cash equivalents of $89.7 million and long-term debt (less current portion) of $1407.6 million. The company purchased 2.3 million shares of its common stock during the quarter and declared a quarterly dividend of 32 cents per share.

Outlook

Darden slightly raised its 2011 earnings per share growth target to 19% year over year from the prior range of 17% to 18%, based on overall sales growth expectation of 5.5%, approximately 1.5% to 2.0% blended same store sales growth for the core three brands and 70 to 75 net new restaurant openings over the year.

Our Take

We believe remodeling programs especially at LongHorn Steakhouse, new menu offerings, cost saving initiatives and continued innovation around promotional efforts led to the earnings per share growth. However, increasing food costs specially beef, underperformance at its core brands Olive Garden and Red Lobster in terms of same-restaurant traffic and stiff competition from the peers like Brinker International inc. (EAT) and Red Robin Gourmet Burgers Inc. (RRGB) will drag its profits.

We currently retain a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

 
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