On June 23, Darden Restaurants Inc. (DRI) reported its fourth quarter 2010 earnings of 81 cents per share, well below the Zacks Consensus Estimate of 88 cents and the year-earlier earnings of 87 cents. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.
Earnings Report Highlights
The earnings were hit by a $12.7 million pre-tax reduction in sales associated with a correction to its third quarter estimate of gift card redemptions. Darden Restaurants’ full year earnings per share were $2.86 versus $2.65 per share in the comparable year while on a reported basis, earnings were recorded at $2.84 compared with $2.65 per share in year-ago level.
Total sales from continuing operations in the quarter decreased 5.7% to $1.86 billion, as blended comparable restaurant sales were down 2.3%. The quarterly comps also fell behind the 1.4% expected decline for the Knapp-Track benchmark of U.S. comparable restaurant sales.
(Read our full coverage on this earnings report: Darden Misses Zacks Estimate)
Earnings Estimate Revisions – Overview
Despite Darden Restaurants’ disappointing fourth quarter results, estimate revision trends among the analysts depict a positive outlook for the upcoming quarters. Analysts believe sales and margins comparison were difficult in the quarter over the fourth quarter 2009. Let’s dig into the earnings estimate details.
Agreement of Analysts
Over the last 7 days, 5 of the 22 analysts covering the stock made upward earnings estimate revisions for first quarter fiscal 2011. A more positive trend is noticed for the second quarter and fiscal 2011, with estimates having been increased by 9 and 11 out of 21 and 26 analysts, respectively. On the other hand, downward revisions in estimates were made for the upcoming two quarters and fiscal 2011 by 3, 1 and 2 analysts, respectively.
Over the last 30 days, second quarter and fiscal 2011 estimates for Darden Restaurants were increased by most of the analysts, while downward revisions have been comparatively fewer. This indicates a positive bias of the analysts toward the company.
Over the 7 days period, no clear directional movement was noticed for fiscal 2012, with 2 out of 15 analysts raising estimates and 2 lowering them.
The analysts, by and large, are mainly impressed with the Darden Restaurants’ bullish guidance provided for fiscal 2011. Despite the fourth quarter miss, management said that same-store sales at its core Red Lobster, Olive Garden brands and LongHorn Streakhouse are expected to grow 2%-3%, with a total revenue growth of 5.5%-6.5%.
Darden Restaurants remains committed to maximizing shareholder value in terms of dividend payment. In the fourth quarter, the company hiked dividend by 28% to 32 cents.
Darden Restaurants boasts a unique position due to its strong value proposition, menu improvements, massive advertising and excellent unit-level execution with differentiated brands. It is one of the few casual dining chains expanding during the sluggish economic environment, and tests new concepts to enhance top-line growth.
In the last five years, Darden Restaurants has kept its restaurant operating cash flow margins stable at 22%-23% despite the recent economic headwinds. Additionally, the cost environment is expected to remain favorable in fiscal 2011.
However, the analysts’ outlook remains comparatively less favorable for fiscal 2012 over the last 30 days with 2 out of 15 analysts increasing their estimates, and 3 decreasing the same based on limited visibility over that period.
Magnitude of Estimate Revisions
The magnitude of estimate revisions for Darden Restaurants has been quite significant over the last 7 days. Following the release of fourth quarter results, estimate for fiscal 2011 has been raised by 3 cents while estimate for fiscal 2012 dipped by the same amount. Darden Restaurants’ estimate for first quarter fiscal 2011 remains unchanged while second quarter estimate was nudged up by a penny.
Our Recommendation
Although we like Darden Restaurants for the above-mentioned factors, we believe declining same-restaurant sales, increased dependence on core brands such as Olive Garden and Red Lobster that are approaching saturation, the recent Gulf oil spill affecting Darden Restaurants’ supply and demand for sea food and stiff competition are among the host of factors that could pose a threat to Darden Restaurants’ growth.
Hence, we maintain a Neutral recommendation on the shares of Darden Restaurants, with a Zacks #3 Rank, which translates into a short-term Hold rating.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “DRI”
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