Darden Restaurants Inc. (DRI) recently cut its earnings per share growth outlook for 2012 mainly due to the underperformance at Olive Garden and higher food costs. The company now expects earnings per share from continuing operations to grow 4%–7% as against the lower end of 12%–15% guided earlier. Prior to this, Darden had narrowed its 2012 outlook from the guided range of 12% to 15%.
Orlando, Florida-based company also narrowed its sales outlook for 2012 to the range of 6% to 7% (versus 6.5% to 7.5% previously) due to 2% to 3% increase in the blended same-store sales (comps) estimate for its three core brands to 3% previously. However, the company retained its 80 to 90 net new restaurants' goal for fiscal 2012.
Darden is slated to release its second quarter fiscal 2012 earnings results on December 16, 2011. The company anticipates earnings per share at 41 cents, which is below the Zacks Consensus Estimate of 54 cents. Combined U.S. same-restaurant sales growth for the second quarter is expected to be approximately 1.8% for Red Lobster, Olive Garden and LongHorn Steakhouse and 3.9% for its Specialty Restaurant Group.
In the to-be reported quarter, Olive Garden will appear as a dampener. The U.S. same restaurant sales at Red Lobster and Longhorn Steakhouse are estimated to rise 6.8% and 5.1%, respectively, but drop 2.5% at Olive Garden.
Recent woes at Olive Garden continue to nag Darden. In each month of the ongoing second-quarter 2012, Olive garden experienced a decline in comps with November being the worst hit. Olive Garden's first quarter U.S. comps were also down 2.9%. Despite management's efforts to mitigate traffic erosion through promotions and lower pricing that restricted the earnings to some extent, traffic count declined in two out of last three months. Notably, dishes featured in the Olive Garden promotion from February to May, failed to be accretive to the company’s earnings.
In the second quarter, Darden closed the acquisition of two Eddie V's Restaurants. While the transaction is expected to be neutral to Darden’s current fiscal year’s earnings per share, the closing costs will hurt its quarterly earnings by a penny.
Darden is taking a series of initiatives such as remodeling, promotional offers, new menu offerings across all price points and marketing programs in order to boost its failing brand. The flaring cost environment is also expected to cool somewhat in the second half of 2012. Additionally, sales at Darden may improve in the latter half of fiscal 2012 and beyond due to easy comparison. Still we believe that Darden will need to depend on growth from its other restaurant concepts in the near term.
Darden, which competes with Kona Grill Inc. (KONA) and Brinker International Inc. (EAT), currently retains a Zacks #3 Rank that translates into a short-term Strong-Hold rating. We also maintain our long-term Neutral recommendation on the stock.
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