Darden Restaurants Inc (DRI) posted first quarter 2012 earnings of 78 cents per share, in line with the Zacks Consensus Estimate, but down 3% from the year-ago quarter's earnings of 80 cents. Hurricane Irene impacted the company’s quarterly earnings by 2 cents.
Total revenue jumped 7.5% from the prior-year quarter to $1,942.0 million and also edged past the Zacks Consensus Estimate of $1,928.0 million. Combined same-store sales for the company’s three core brands, Olive Garden, Red Lobster and LongHorn Steakhouse, rose 2.8% and recorded better-than-expected growth of 1.0% as per the Knapp-Track benchmark of U.S. same-restaurant sales. The upside in revenue was also led by significant growth in Specialty Restaurant Groups and unit expansion.
Operating Highlights
By restaurant concepts, Olive Garden’s sales inched up 0.8% year over year to $884.0 million in the first quarter, driven by contributions from 30 net new restaurants, but partially offset by a 2.9% decline in comps growth.
Sales at Red Lobster escalated 12.3% to $674.0 million attributable to revenues from five net new restaurants as well as a 10.7% rise in comps.
At LongHorn Steakhouse, sales were up 12.1% to $253.0 million based on a 4.8% growth in comps. Moreover, revenues from 23 net new restaurants in the quarter also contributed to the upside.
Sales at The Specialty Restaurant Groups increased 20.7% to $129.0 million, driven by comps growth of 7.0% at The Capital Grille, 2.9% at Bahama Breeze and 2.5% at Seasons 52. The growth in revenues was also due to the addition of four new Capital Grille restaurants, seven new Seasons 52 restaurants and one new Bahama Breeze restaurant.
Financial Position
Darden ended the quarter with cash and cash equivalents of $74.2 million and long-term debt (less current portion) of $1405.9 million. In the first quarter, the company purchased 1.9 million shares of its common stock and declared a quarterly dividend of 43 cents per share.
Outlook
Darden expects 2012 earnings per share growth toward the lower end of its previously announced range of 12% to 15%, based on overall sales growth between 6.5% and 7.5%, approximately 3.0% blended same-store sales growth for its three core brands and 80 to 90 net new restaurant openings over the year.
Our Take
Darden reported in line results for the quarter and reaffirmed its outlook. Management remains optimistic about the second half of 2012 based on lower food cost pressure, benefit from share repurchases, improving blended comparable restaurant sales across all other brands and business at its core brand – Olive Garden.
Hence, we expect estimates to go up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $3.80 and $4.29, respectively.
Darden is well positioned given its strong value proposition, menu improvements, excellent unit-level execution with differentiated brands and a balanced portfolio, which provides greater diversification in sales and cost synergies. However, increasing food costs and stiff competition from peers like Brinker International inc. (EAT) and Red Robin Gourmet Burgers Inc. (RRGB) will drag profits.
Darden currently has a Zacks #3 Rank (short-term Hold rating). We also reiterate our long-term Neutral recommendation.
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