Home > Stock Analysis

Darden Could Be The Cannoli In The Coalmine

Posted: Mar 24, 2009 09:51 AM by Ryan C. Fuhrmann

Tickers in this Article: PFCB, CBRL, BWLD, CPKI, DRI

Darden Restaurants (NYSE:DRI) reported results on March 18 that turned out be much better than investors were expecting. The coast is still not clear when it comes to concerns that consumers have stopped eating out, but it is arguable that Darden is a bellwether in the casual dining industry. It is the largest player in the space, has a broad concept mix and geographic diversity across the U.S. and Canada. If you're hungry for some restaurant stocks, there will be much room for improvement in this industry once more tangible signs of economic growth emerge.

IN PICTURES: Eight Ways To Survive A Market Downturn

Get Free Stock Analysis By Email

Quarterly Recap
Third-quarter sales from continuing operations were essentially flat, falling 0.7% to $1.8 billion. New stores Red Lobster and Longhorn Steakhouse weren't enough to offset a same-store sales decline of 3.2%. Management was quick to point out this outperformed a 6.5% decline in a casual dining benchmark it tracks. Looking at the competitive landscape, PF Chang's (Nasdaq:PFCB) recently reported a 7.1% fall in comps and underperformed all of Darden's chains, while Buffalo Wild Wings (Nasdaq:BWLD) posted 4.5% comps to outperform Olive Garden, which has been Darden's strongest chain.

By concept, Olive Garden (46% of Darden's quarterly sales) reported positive overall growth of 3% as the addition of 36 new restaurants offset a 1.4% fall in comps. Red Lobster (36%) saw sales fall 4.3% on a 4.6% drop in comps, while LongHorn Steakhouse (just under 13%), which was obtained from the acquisition of RARE Hospitality, experienced 1.4% overall growth on 19 new locations and negative 5.4% comps. High-end steakhouse Capital Grille was also part of the RARE purchase and reported a 10% sales drop, though with total sales of only $61 million (3.4%), this drop has little impact on Darden overall. The same goes for the remaining Bahama Breeze locations (1.6%), which reported a 9.1% fall in sales to $28 million.

Excluding a one-time merger integrations charge, Darden reported that earnings fell two cents from last year's quarter to 78 cents. This came in well above analyst projections and sent the shares up approximately 14% the day after the earnings release. Olive Garden again led the way as the only division to report an improvement in operating income. However, on balance, overall results weren't as dour and feared and were a rarity as the casual dining industry hasn't reported much for investors to cheer about lately.

Outlook
Darden also provided full-year guidance ahead of analyst expectations. It now projects diluted earnings to be flat to down 3% from 2008, while the addition of 70 new restaurants across its concepts should lead to 9-9.5% top-line growth. The previous guidance was a fall of 5-10%. In terms of comps, it expects growth of 1.25-1.75%, which is also better than many peers are expecting. California Pizza Kitchen (Nasdaq:CPKI) and Cracker Barrel (Nasdaq:CBRL) both expect a mid-single-digit fall in comps for the coming year. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Bottom Line
Based off the current share price, Darden is trading at about 13 times 2009's estimated earnings. That's far higher than just a few months ago, when the stock fell to $13, but at least conditions appear to be stabilizing. It's conventional wisdom these days that a good number of consumers are tired of eating at home or are beginning to see the light at the end of the tunnel after major uncertainty over where the employment markets and economy may be heading. Stock prices across the industry have already moved to incorporate this trend, but there will be much more room for improvement when more tangible signs of economic growth become visible.

Learn more about investing in stocks such as these, in our related article Sinking Your Teeth Into Restaurant Stocks.

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS