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Analyst Blog

On December 20, Darden Restaurants Inc. (DRI - Analyst Report) reported second quarter 2013 earnings of 26 cents per share, in line with the Zacks Consensus Estimate but lower than the year-ago earnings of 41 cents per share. Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and the Zacks rating for the short-term and long-term outlook for the stock.

Earnings Report Highlights

Total revenue grew 7.0% from the prior-year quarter to $1,960.0 million, which surpassed the Zacks Consensus Estimate of $1,954.0 million. Combined same-store sales (comps) for the company’s three core brands -- Olive Garden, Red Lobster and LongHorn Steakhouse -- dropped 2.7%, while the same for the company's Specialty Restaurant Group nudged up 0.7%.

Earnings Estimate Revisions - Overview

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

Agreement of Estimate Revisions

Over the last 7 days, 6 of the 26 analysts covering the stock raised their estimates for third quarter 2013 while the same number of analysts moved their estimates downwards. The tone was more depressing for the fourth quarter, with 6 out of 25 analysts increasing their estimates and 9 analysts revising downward. For fiscal 2014, 2 out of 25 analysts upped their estimates while as many as 12 analysts moved their estimates in the opposite direction.

Over the last 30 days period, no analyst moved his/her estimate northward for upcoming quarter and fiscal 2013 as well as 2014 to reflect Darden’s cut in fiscal 2013 guidance prior to the earnings release. In fact, a great number of analysts slashed their estimates in the said period.

The analysts, by and large, are mainly disappointed with the slowdown in comps of Darden’s pivotal concepts, Olive Garden, Red Lobster and LongHorn Steakhouse 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 30 days. For the upcoming quarter, the estimate dropped by 20 cents to $1.13 while for fiscal 2013, it took a deeper plunge of 48 cents to $3.38.

Over the last seven days period, while estimate remained unchanged for the upcoming quarter, estimate for the fourth quarter of 2013 and fiscal 2014 were revised downward by a penny and nickel, respectively.

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 be a spot of bother for the rest of 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, we are yet to see any sustained improvement.

Darden, which competes with Kona Grill Inc. (KONA - Snapshot Report) and Brinker International Inc. (EAT - Analyst Report), currently retains a Zacks #5 Rank (short-term Strong Sell 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/

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