On June 21, Darden Restaurants (NYSE:DRI), operator of Red Lobster and Olive Garden -- two of my favorite dining spots -- will announce earnings for Q4 and FY 2006. Having slid some 16% since its 52-week high back in February, the stock looks more appetizing from a buyer's standpoint. Is its decline justified? Read on.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts consider this well-followed company a hold, while five analysts each recommend a buy or a sell.
  • Revenues. For the quarter, 16 analysts project $1.5 billion, up 8% year over year. For the year, 18 analysts have consensus estimates of $5.71 billion, another 8% increase.
  • Earnings. Twenty-two analysts project $0.60 per share in quarterly earnings, about 15% higher than last year. For the year, they'd like to see $2.14 per share, a 20% year-over-year increase.

What management says:
In discussing the third-quarter results, Clarence Otis, chairman and chief executive officer, said, "We had outstanding financial results despite some difficult prior-year comparisons, driven by continued strength at Red Lobster and Olive Garden." By "difficult comparisons," he meant that the two primary concepts showed same-store sales growth of 1.6% for Red Lobster and 5.7% for Olive Garden in the year-ago quarter. So far this quarter, March and April comps have averaged 11% -- 12% for Red Lobster, and 2%-2.5% for Olive Garden.

Otis further noted that his company aimed to be "the best in casual dining, now and for generations." I like the long-term outlook this comment implies.

In discussing Darden's other two concepts, President and COO Drew Madsen said, "Bahama Breeze and Smokey Bones also made progress executing their respective plans to broaden appeal and strengthen their business model. We are confident that they are taking the appropriate action to fully realize their potential." If these chains can become as numerous and popular as the company's other two concepts, Darden should enjoy continued growth for years to come.

What management does:
Margins have been increasing for each of the last six rolling-12-month periods, showing excellent cost control at all levels of the company. Year-over-year sales growth has been lumpy, but has remained mostly in the high single digits, except for the May 2005 quarter. Personally, I hope Darden continues annual promotions such as Red Lobster's Lobsterfest. It's become a tradition every spring for my wife and me, and I'll gladly do my part to help smooth out sales growth if Lobsterfest and similar events keep coming back.

Margins %*

11/04

2/05

5/05

8/05

11/05

2/06

Gross**

69.8

69.8

69.8

70.0

70.2

70.3

Operating

8.7

8.9

9.0

9.2

9.3

9.7

Net

4.8

4.9

5.5

5.6

5.8

5.9

Sales Growth %***

7.6

10.8

2.6

10.2

7.8

7.1
* Trailing-12-month data for quarter ending in month indicated.
** Based on gross profit defined as sales less cost of food.
*** Year-over-year comparison for quarter ending in month indicated.
All data from relevant company 10-K and 10-Q filings.

One Fool says:
This company has a lot of room to expand. With two successful concepts in Red Lobster and Olive Garden (680 and 575 locations, respectively, as of the end of last quarter), they have barely begun international expansion; each restaurant only has a few locations in Canada. Bahama Breeze and Smokey Bones, the other two concepts, could potentially grow to be as popular and numerous. Cannibalizing sales doesn't seem to be a concern; in several different cities, I've seen the two primary restaurants within blocks of each other. Adding a Smokey Bones location, for instance, probably would do more good than harm.

In an industry with slowing and even declining comps in recent quarters, Darden stands ahead of peers such as Applebee's (NASDAQ:APPB) or Chili's owner Brinker International (NYSE:EAT). Olive Garden alone has achieved 46 consecutive quarters of comps growth, while the company as a whole has six consecutive quarters on the line tomorrow. We'll see if they make it lucky number seven.

Darden's stock has been on a tear, too, doubling over the past two years. For hungry investors, the recent decline in price might be an opportunity to gobble up some shares.

Competitors:

  • Applebee's
  • Brinker International
  • The Cheesecake Factory (NASDAQ:CAKE)

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Fool contributor Jim Mueller does not own shares in any company mentioned.