Restaurateur Darden Restaurants Inc.’s (DRI) posted dismal second-quarter fiscal 2014 results. Earnings from continuing operations of 15 cents per share missed the Zacks Consensus Estimate of 20 cents by nearly 25.0%.
Quarterly earnings were also down 42.3% from the year-ago level. The significant decline reflects increase in total costs and expenses. The company however declared a comprehensive plan to boost shareholder value, which includes a possible spin-off of its Red Lobster segment.
Revenues
Total revenue grew 4.6% year over year to $2,049.9 million, driven by new unit openings and 4.1% same-restaurant sales growth in the Specialty Restaurant Group. However, revenues fell shy of the Zacks Consensus Estimate of $2,068.0 million.
The company owns and operates restaurant chains such as Red Lobster, Olive Garden, LongHorn Steakhouse and The Specialty Restaurant Group.
Combined comps at the company’s three core brands – Olive Garden, Red Lobster and LongHorn Steakhouse – were down 1.0% compared to growth of 0.5% in the first quarter of fiscal 2014. Comps declined 0.6% at Olive Garden and 4.5% at Red Lobster. Similar to the fiscal first quarter of 2014, only Longhorn Steakhouse managed to post comps growth of 5.0%.
Sales at Olive Garden were up 2.4% year over year to $869.0 million in the second quarter attributable to new unit openings, partially offset by a 0.6% decline in comps.
Sales at Red Lobster decreased 4.9% to $561.0 million due to a 4.5% decline in U.S. comps and closure of one unit.
At LongHorn Steakhouse, sales were up 16.5% to $320 million. As many as 46 net new restaurants and 5.0% improvement in comps contributed to the upside.
Sales at The Specialty Restaurant Group increased 20.6% to $291 million, thanks to comps growth of 6.7% at The Capital Grille, 6.2% at Bahama Breeze, 5.7% at Eddie V's, 1.2% at Yard House and 1.2% at Seasons 52. The upside could be attributed to higher revenues from 4 new The Capital Grille restaurants, 4 Bahama Breeze restaurants, 10 Seasons 52 restaurants, 2 Eddie V's and 7 Yard House restaurants.
Operational Highlights
Total costs and expenses during the reported quarter were $2,031.8 million, up 6.0% year over year mainly due to 6.5% higher cost of sales and 6.0% higher selling, general and administrative expenses.
Financial Update
As of Nov 24, 2013, cash and cash equivalents were $84.6 million, down from $108.9 million as of Aug 25, 2013. Long-term debt, less current portion was $2,480.1 million, up from $2,476.4 million as of Aug 25, 2013.
Restructuring and Reorganization
In order to enhance shareholder value and leverage the benefits of the company's position, Darden announced a comprehensive plan to separate its Red Lobster business (either through spin-off or sale of the segment). The company also intends to lower unit expansion, which will automatically reduce capital spending by at least $100 million on an annual basis.
This would increase cash flow, which could then be returned to shareholders via dividends and share repurchases. The company also intends to refine its incentive plans for senior management so that they focus more on comps growth and cash flow. Moreover, it intends to defer acquisitions for the time being.
Lower Guidance for 2014
Darden expects the business environment to remain sluggish in fiscal 2014. The company expects earnings per share for fiscal year 2014 to decline in the range of 15.0% to 20.0% year over year versus its prior expectation of a decline of 3.0% to 5.0%.
The company also lowered its expectation for blended comps growth for its three core brands in the range to (1.0%) to (2.0%) versus its prior expectation of flat to up 2%. The lowered guidance reflects lower comps mainly at Red Lobster during fiscal first and second quarter of 2014.
Our Take
Like the previous quarter, Darden’s top and bottom line failed to meet the Zacks Consensus Estimate. Slower macroeconomic recovery, adverse impact of the Affordable Care Act and faltering consumer confidence are expected to be headwinds for fiscal 2014. Decline in comps at Red Lobster during first and second quarter fiscal 2014 could well be the reason behind the company’s decision to separate the business.
Although Darden has undertaken a set of initiatives to boost its business, we remain skeptical until definitive signs of improvement are noticed. Darden currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Buffalo Wild Wings Inc. (BWLD), Burger King Worldwide, Inc. (BKW) and Chipotle Mexican Grill, Inc. (CMG). All these stocks hold a Zacks Rank #2 (Buy).
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