We remain Neutral on
Darden Restaurants Inc.
). Although the Orlando, Fla-based restaurateur's fiscal first
quarter 2014 results failed to impress us, we have faith in the
company's long term fundamentals
Why the Reiteration?
On Sep 20, 2013, Darden posted fiscal first-quarter 2014 earnings
of 53 cents per share, which 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 and soft revenues
pressurized earnings during the quarter.
Although its revenues of $2.16 billion grew 6.1% year over year,
it fell shy of the Zacks Consensus Estimate of $2.18 billion.
Underperformance in two of its core brands -- Red Lobster and
Olive Garden -- led to the soft sales in the quarter. Overall
comps were sluggish in the quarter. Olive Garden and Red Lobster
declined 4.0% and 5.2%, respectively in the quarter.
Darden expects food and beverage expenses to rise in fiscal
2014. Seafood inflation, which was insignificant in the first
quarter, will likely see a double-digit increase in the remaining
nine months of the fiscal year. Energy costs are expected to be
slightly higher on a year-over-year basis, primarily due to
increases in the price of natural gas. Overall, the company
raised its commodity cost inflation guidance by 50 bps from its
prior expectation. Higher costs along with increased expenses on
promotions and discounting pricing strategy will keep margins
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Despite the unenthusiastic first-quarter results, we are positive
on Darden's diversified brand portfolio that provides sales
diversification and cost synergies. Also, Darden's Specialty
Restaurant Group brand has evolved over the last couple of
quarters. Ongoing remodeling initiatives can drive sales
significantly over the long term.
In order to boost its profits and gain financial flexibility amid
a sluggish sales environment, 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.
Lastly, increasing shareholder value, irrespective of economic
ups and downs, is another tailwind for the stock.
Darden currently carries a Zacks Rank #3 (Hold). Others players
in the same industry, which look attractive at current levels
AFC Enterprises Inc.
Cracker Barrel Old Country Store, Inc.
Domino's Pizza, Inc.
), all carrying a Zacks Rank #2 (Buy).