Florida-based Darden Restaurants Inc. (DRI) is slated to release its second quarter 2011 earnings on December 21. The current Zacks Consensus Estimate is 54 cents for the second quarter (reflecting a year-over-year growth of 25.5%).
Darden has outperformed the Zacks Consensus Estimate thrice and has missed it once in the last four quarters. The average earnings surprise was a positive of 1.82%. This implies that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.
First Quarter Flashback
Darden’s first quarter 2011 earnings of 80 cents per share were well ahead of the Zacks Consensus Estimate of 77 cents. Total revenue spiked up 4.2% from the prior-year quarter to $1.81 billion, but was marginally short of the Zacks Consensus Estimate of $1.82 billion. Combined same-store sales for the company’s three core brands, namely Olive Garden, Red Lobster and LongHorn Steakhouse, rose 1.1% and fared better than the zero expected growth as per the Knapp-Track benchmark of U.S. same-restaurant sales.
Outlook
The company continues to expect blended U.S. same-restaurant sales growth for Red Lobster, Olive Garden, and LongHorn Steakhouse to remain in the range of 2.0% to 3.0% for FY11. Based on these same-restaurant sales expectations and approximately 70 to 75 net new restaurant openings, total sales growth is estimated to be between 5.5% and 6.5%. This, coupled with a continued margin improvement,, translates into earnings per share growth of 14% to 17%.
Estimates Revisions Trend
Estimates have moved up in the last 30 days, implying that the analysts depict a positive outlook for the upcoming quarter.
Agreement of Analysts
Revision trends, in the last 30 days, drifted toward the positive side with no negative change. For the second quarter, out of 28 analysts covering the stock, four raised their estimates while none moved in the opposite direction. For both fiscal 2011 and 2012, estimates were raised by 5 and 4 analysts out of 28 and 26 analysts, respectively, while none of the analysts lowered the same.
In the last 7 days, 2 analysts have raised their estimates for both the coming quarter and 2011 and 1 has upped the estimate for 2012. None of the analysts has slashed the estimate.
Positive revisions by the analysts are based on the company’s ability to keep its restaurant operating cash flow margins stable at 22%–23% for the last 5 years, despite the recent economic downturn. Moreover, the cost environment is expected to remain stable in fiscal 2011. Darden continues to see incremental year-over-year benefits in fiscal 2011 and 2012 from its major cost-saving efforts, including supply-chain automation.
The analysts are also optimistic regarding the recent development agreement of the company with the food service franchise operator, Americana Group of Kuwait to enter the Middle East market. Americana Group will develop and operate all three of Darden’s brands Red Lobster, Olive Garden and LongHorn Steakhouse in the Middle East. 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.
Magnitude of Estimate Revisions
Over the past 60 days, Darden’s estimate for the second quarter remained stable at 54 cents, implying that the analysts expect the company to report in line.
In the last 30 days, for fiscal 2011, the Zacks Consensus Estimates are raised by 2 cents to $3.35 and for 2012 by a penny to $3.79.
Our Take
We expect Darden to provide second quarter earnings ahead of the Zacks Consensus Estimate.
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 a 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.
On the flip side, the continuous decline in same-store sales in Red Lobster, increased dependence on core brands such as Olive Garden and Red Lobster that are approaching saturation, the recent Gulf oil spill that is affecting Darden’s supply and demand for sea food and stiff competition are factors that could hinder the company’s growth in the coming days.
Hence, the company has 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.
DINEEQUITY INC (DIN): Free Stock Analysis Report
DARDEN RESTRNT (DRI): Free Stock Analysis Report
Zacks Investment Research
