Earnings Scorecard: Darden

On June 22, Darden Restaurants Inc. (DRI - Analyst Report) reported fourth quarter 2012 earnings of $1.15 per share, in line with the Zacks Consensus Estimate but higher than the year-ago earnings of $1.00 per share. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for the short-term and long-term outlook for the stock.

Earnings Report Highlights

Total revenue increased 3.8% from the prior-year quarter to $2,065.6 million but fell short of the Zacks Consensus Estimate of $2,107.0 million. Combined same-store sales for the company’s three core brands, Olive Garden, Red Lobster and LongHorn Steakhouse, dropped 1.9%. An earlier Lenten season and Easter holiday this year hurt the combined result in the reported quarter.

Earnings Estimate Revisions - Overview

Following Darden Restaurant’s fourth quarter results, estimate revision trend depicted a clear negative bias for the upcoming quarters. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

Over the last 7 days, 3 of the 23 analysts covering the stock raised their estimates for first quarter 2013 while 8 analysts moved downwards. The tone was more depressing for fiscal 2013, with only one analyst increasing his or her estimate and 20 analysts revising downward. For fiscal 2014, 10 out of 20 analysts slashed their estimates while none moved in the opposite direction.

The analysts, by and large, are mainly disappointed with the slowdown in comps in two of Darden’s core concepts, Olive Garden and Red Lobster as well as the failure of the promotional offers in the backdrop of a challenging macro environment. Additionally, sluggish same-restaurant traffic count and management’s conservative guidance were also concerning.

Magnitude of Estimate Revisions

The magnitude of revision for Darden has also been quite significant over the last 7 days. For the upcoming quarter, estimate dropped by 3 cents to 85 cents while for fiscal 2013, it took a deeper plunge of 11 cents to $3.93.

Our Recommendation

Decline in same-restaurant sales, anemic performance by core concepts that almost approached saturation, stiff competition, and high discount rates imposed on menu prices to fight the intricate economic conditions are among the host of factors that could pose a threat to Darden Restaurants’ growth.

In fact, Darden expects the macroeconomic tension and faltering consumer confidence to continue bothering in 2013, which makes the Orlando, Florida-based company guide softly. Although Darden resorted to several turnaround initiatives and value messaging to beat the recent woes at Olive Garden, analysts have yet to see any sustained improvement.

However, on a positive note, the performance of its specialty restaurant and LongHorn Steakhouse were saviors in the quarter. The flaring cost environment is also cooling off, and will in turn help Darden to score better in fiscal 2013.

Darden, which competes with Kona Grill Inc. (KONA - Snapshot Report) and Brinker International Inc. (EAT - Analyst Report), currently retains a Zacks #3 Rank that translates into a short-term Hold rating.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/