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Restaurateur Darden Restaurants Inc.’s (DRI - Analyst Report) first-quarter fiscal 2014 earnings from continuing operations of 53 cents per share missed the Zacks Consensus Estimate of 69 cents by nearly 23.2%. Quarterly earnings were also down 37.6% from the year-ago level. Margin shortfall pressurized earnings during the quarter.

Total revenue grew 6.1% year over year to $2.16 billion, driven by new unit openings and 0.5% same-restaurant sales growth in the Specialty Restaurant Group. However, revenues also fell shy of the Zacks Consensus Estimate of $2.18 billion.

Operational Highlights

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 3.3%. Comps declined 4.0% at Olive Garden and 5.2% at Red Lobster. Only LongHorn Steakhouse managed to post comps growth of 3.2%.

Olive Garden’s sales were down 0.4% year over year to $918 million in the first quarter, owing to a 4.0% decline in comps.

Sales at Red Lobster decreased 5.5% to $624 million due to a 5.2% decline in U.S. comps and closure of one unit.

At LongHorn Steakhouse, sales were up 14.2% to $325 million. As many as 47 net new restaurants and 3.2% improvement in comps contributed to the upside.

Sales at The Specialty Restaurant Group increased sharply by 72.7% to $282 million, thanks to comps growth of 3.2% at The Capital Grille, 2.7% at Bahama Breeze and 2.1% at Eddie V's, However, Seasons 52 and Yard House were laggards in the quarter having registered a respective decline of 4.4% and 1.5% in comps. Net new unit openings, sales gain from 40 Yard House restaurants and the opening of 6 Yard House restaurants since its acquisition also helped drive comps.

Guidance for 2014

Darden expects the business environment to remain sluggish in fiscal 2014. According to the company, consumers have become extremely value-sensitive and economic recovery will be slow.

Orlando, FL-based Darden reiterated its expectation for blended comps growth for its three core brands in the range of flat to up 2%.
Despite lower-than-expected first quarter results, the company has maintained its earlier guidance of a 3% - 5% year-over-year decline in earnings per share. Tough year-over-year comparison is expected to lead to this decline.

Darden plans to reduce its annualized operating support spending by approximately $50 million through layoffs and lower program spending. Of the anticipated gains, $25 million will be realized in fiscal 2014. However, Darden will incur $10 million in expenses this fiscal to execute its plan.

Our Take

Darden failed to maintain the momentum of the last quarter, in which it recorded positive comps growth at all its restaurants. Slower macroeconomic recovery, adverse impact of the Affordable Care Act and faltering consumer confidence are expected to be headwinds for fiscal 2014.

Although Darden undertook a set of initiatives to boost its business, we remain skeptical until definitive signs of improvement are noticed.

Darden currently carries a Zacks Rank #4 (Sell). Stocks in the restaurant industry that are currently performing well include CEC Entertainment Inc. , AFC Enterprises Inc. and Domino’s Pizza Inc. (DPZ - Analyst Report) all carrying a Zacks Rank #2 (Buy).

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