Darden Dishes Out Mixed 1Q

Darden Restaurants Inc. (DRI - Analyst Report) posted first quarter fiscal 2013 earnings from continuing operation of 85 cents per share, ahead of the Zacks Consensus Estimate of 83 cents as well as the year-ago earnings of 78 cents per share. Costs associated with the acquisition of Yard House USA, affected first-quarter’s earnings per share by a penny.

Total revenue grew 4.8% from the prior-year quarter to $2,034.8 million but fell short of the Zacks Consensus Estimate of $2,036.0 million. Combined same-store sales (comps) for the company’s three core brands -- Olive Garden, Red Lobster and LongHorn Steakhouse -- dropped 0.3%, while the same for the company's Specialty Restaurant Group grew 2.2%.

Operating Highlights

By restaurant concepts, Olive Garden’s sales grew 4.3% year over year to $922.0 million in the first quarter, driven by contributions from 40 net new restaurants, offset somewhat by a 0.3% upside in comps growth.

Sales at Red Lobster decreased 2.1% to $660.0 million as a 2.6% decrease in comps weakened the concept’s performance. However, revenues from 6 net new restaurants provided the partial offset.

At LongHorn Steakhouse, sales were up 12.7% at $285.0 million on the back of a 3.6% growth in comps. Moreover, revenues from 34 net new restaurants in the quarter also contributed to the upside.

Sales at The Specialty Restaurant Groups increased 26.4% to $163.0 million, driven by comps growth of 4.0% at The Capital Grille, 1.2% at Bahama Breeze and 1.3% at Seasons 52. The growth in revenues was also aided by the addition of one net new Capital Grille units, four net new Seasons 52 units and five new Bahama Breeze restaurants. The addition of 11 restaurants, purchased from Eddie V's restaurants in November last year, also contributed to the growth.

Liquidity

Darden ended the quarter with cash and cash equivalents of $51.5 million and long-term debt (less current portion) of $1453.9 million.

Share Repurchase

In the first quarter, the company bought back 1.0 million shares of its common stock.

Guidance

Orlando, Florida-based Darden foresees its sales growth for fiscal 2013 in the range of 9—10% (prior expectation was 6—7%) based on a 1—2% increase in the blended same-store sales estimate for its three core brands. The acquisition of Yard House helped stimulate sales expectations.

The company reiterated its net unit opening guidance at 100—110 for fiscal 2013, excluding Yard House. Finally, the company expects its earnings per share to increase in the range of 5—9% for 2013 (prior guided range was 8—12%).

Darden expects the Yard House transaction to be 3–5 cents dilutive to its current fiscal year’s earnings per share after considering acquisition-related costs of 7–10 cents and projected operating results at the newly acquired brand.

Our Take

Slowdown in comps in one of Darden’s core concepts, Red Lobster was a key observation from Darden’s first quarter earnings. Darden expects the macroeconomic tension and faltering consumer confidence to be a persistent headwind in 2013.

However, on a positive note, Olive Garden seems to inch forward towards improvement after a lackluster performance in the previous quarter. LongHorn Steakhouse and specialty restaurant group were the star performers in the quarter. Further, favorable food and energy costs will also support Darden in 2013.

With the recent Yard House acquisition, Darden’s long-term prospect looks promising. The concept will likely be accretive to earnings from fiscal 2014.

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