Darden's Recovery May Already Be Priced In

Quick-service restaurant giant Darden Restaurants (NYSE: DRI  ) delivered some disappointing results last week as the company witnessed bottom-line sales sink well into the double digits, but it showed some of its segments generating appealing comparable sales. As with many retail and restaurant operations in recent months, Darden management remains cautious looking ahead and finds the consumer-spending environment to continue its pressure on profits. However, with the ongoing integration of a relatively new chain, remodeling of its three largest chains, and some operational cost-cutting, Darden is trying to set up for a brighter tomorrow, hopefully coinciding with a more confident customer base. Here's what you need to know.

Earnings recap
The owner of massive chains such as Red Lobster and Olive Garden, Darden Restaurants brought in more than 6% more in top line sales over the previous year, hitting $2.16 billion. However, increased expenses and weak store traffic kept adjusted bottom-line profit to $0.53 per share -- far short of Wall Street's estimates at $0.70 per share, and nearly 38% less than last year's fiscal first quarter.

Olive Garden saw its same-store sales fall 4% and Red Lobster showed sales down 5.2%, but Longhorn Steakhouse balanced things out with a 3.2% gain. The company's Specialty Restaurant Group, which incudes chains such as The Capital Grille, Eddie V's, and newly acquired Yard House, had blended same-store sales up 0.5%.

Through program spending cuts and an employee reduction, management is looking to shave $50 million in cost savings, annually, over the course of the next couple of years. Investors should keep in mind, though, this will be offset in the near term by an upfront cost of $10 million.

Looking ahead through fiscal 2014, management expects adjusted EPS to continue its downward trend, showing a 3%-5% discount from last year's numbers. While opening 80 net new restaurants, Darden management sees same-store sales growth as flat.

Things didn't go so well for Darden this past quarter, and the coming year doesn't give much to celebrate, but is the long-term rosier with an expanding restaurant count and more efficient operations?

Bland tastes
As the macro environment improves over time and Darden spruces up its existing restaurants while building new ones, those same-store sales figures will probably improve. The year-over-year losses should subside, too. However, the pending improvements seem, for the most part, to be priced into the stock already, which trades at 14.3 times earnings and holds an EV/EBITDA of 8.63 times. It's also yet to be seen if the remodeling efforts yield an appealing return on capital.

Competitor DineEquity trades at richer valuations and yields a lower dividend, but the comparison doesn't quite put Darden into value territory.

In next quarter's results, prospective investors should hope for another miss -- sending shares down further and possibly creating a value opportunity. Patient investors will see the company's efforts pay off, but it will be the bargain hunters who reap the benefits.

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10/24/2014 4:00 PM
DRI $51.05 Up +0.75 +1.49%
Darden Restaurants… CAPS Rating: **
DIN $83.90 Up +0.60 +0.72%
DineEquity CAPS Rating: **

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