Restaurateur, Darden Restaurants Inc. (DRI) posted first quarter fiscal 2015 results. Earnings and same-restaurant sales were in-line with the numbers provided in its preliminary results on Sep 2, 2014.
In a separate press release, Starboard that holds 8.8% of the outstanding common stock of the company came up with a detailed transformation plan and urged shareholders to vote for the candidates proposed by it for the board of directors. Meanwhile, Darden has issued a separate statement stating that many of the strategies proposed by Starboard have already been implemented and advised shareholders to choose nominees recommended by it.
Shares of the company were trading higher in the pre-market session, possibly due to improved comps. Adjusted earnings from continuing operations of 32 cents were in line with the Zacks Consensus Estimate. However, earnings declined 40% from 53 cents per share reported in fiscal first quarter 2014 due to unfavorable year-over-year comparisons.
We would like to remind investors that the year-ago figure included results from the Red Lobster segment, which has now been divested. Adjusted earnings exclude certain one-time items related to the sale of Red Lobster, costs related to certain aspects of the company's strategic action plan, restaurant impairment charges and debt breakage expenses. However, including these items, net loss per share from continuing operations was 14 cents compared to earnings per share of 32 cents in the year-ago quarter.
Total revenue increased 4.2% year over year to around $1.60 billion, attributable to revenues from 55 net new restaurants and comps growth at LongHorn Steakhouse and the Specialty Restaurant Group. Revenues were also in line with the Zacks Consensus Estimate.
Behind the Headline Numbers
Darden completed the sale of its Red Lobster segment to Golden Gate Capital for $2.1 billion in cash in Jul 2014. This leaves it with restaurant chains such as Olive Garden, LongHorn Steakhouse and The Specialty Restaurant Group.
At LongHorn Steakhouse, sales were up 9.7% to $356.9 million. As many as 27 net new restaurants and positive comps contributed to the upside. Comps at LongHorn Steakhouse increased 2.8%, better than comps growth of 2.4% in the prior quarter but lower than 3.2% in the year-ago quarter. Comps growth at Longhorn is expected to be in the range of 1% to 2% in fiscal 2015.
Sales at Olive Garden declined 0.5% year over year to $913.5 million in fiscal first quarter 2015 due to a decline in comps, partially offset by revenues generated from 8 net new restaurants. Comps at Olive Garden declined 1.3% but compared favorably with a decline of 4% in the year-ago quarter and 3.5% in the prior quarter. In order to revive traffic growth and support margin expansion, the company is working on its Olive Garden Brand Renaissance plan that has helped in improving comps. The company expects comps at Olive Garden to be in the range of flat to up 1% in fiscal 2015.
Sales at The Specialty Restaurant Group increased 14.5% to $322.3 million, thanks to comps growth of 3.9% at The Capital Grille, 1.1% at Bahama Breeze, 2.3% at Yard House, and 2.5% at Eddie, partially offset by comps decline of 0.3% at Seasons 52. The upside could be attributed to higher revenues from the opening of new restaurants. The Specialty Restaurant Group posted positive comps for the second consecutive quarter. Comps were up 2.1% better than the year-ago comps growth of 0.5% and prior quarter comps growth of 2%. Specialty Restaurant is likely to witness comps growth of approximately 2% in fiscal 2015.
Total costs and expenses during the reported quarter were $1.64 billion, up 10.6% year over year mainly due to higher food, beverage and restaurant labor costs.
Fiscal 2015 Financial Outlook
On an adjusted basis, the company continues to expect adjusted earnings per share from continuing operations of $2.22 to $2.30 for 2015. The Zacks Consensus Estimate for fiscal 2015 is pegged toward the lower end of the range at $2.23.
Adjusted earnings from continuing operations are expected in the range of 26 to 28 cents per share, 80 to 84 cents per share and 87 to 91 cents per share for the second, third and fourth quarters of fiscal 2015, respectively.
In fiscal 2015, the company expects the SG&A ratio to be lowest since it became a public company. This is attributable to the initiatives taken by the company to improve its costs structure.
Starboard’s Transformation Plan
Starboard one of the largest shareholders of Darden has announced a detailed transformation plan for the company. The plan includes company-wide operational improvements that will enable the company to generate $300 million more EBITDA, a turnaround plan for Olive Garden, a strategy that would enhance the real estate assets of the company and also a new franchising program.
The plan also focuses on maintaining the current dividend while safeguarding the investment grade rating. Starboard has stated that if the shareholders want this plan to be implemented, then they will have to vote for its full slate of twelve highly qualified director candidates for election to the company's board of directors at the 2014 Annual Meeting of Shareholders to be held in Oct 2014. It has urged shareholders to reject four members of Darden’s board.
However, Darden also issued a statement saying that many of the brand and cost optimization strategies provided by Starboard have already been implemented across the company and are yielding results. Also, the company stated that the Olive Garden Brand Renaissance plan as well as the efforts to grow and develop LongHorn Steakhouse and Specialty Restaurants are on track. The company has advised shareholders to vote for nominees assigned by it.
Other Stocks to Consider
Darden currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). While Chipotle Mexican Grill and Jamba sport a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy).
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