No one expects Darden (NYSE:DRI) to be a growth vehicle, but you'd like the company to at least have a little more backbone than some of the invertebrates it serves up at Red Lobster.
Last night's fiscal third-quarter report from Darden wasn't all that spine-tingling. Net sales rose 4.7% to $1.54 billion, while earnings inched up all of just 1% to hit $106.4 million. Darden opens up its press release by claiming that earnings per share rose by 7%, but that's a bit misleading; aggressive share buybacks have trimmed fully diluted shares outstanding by 5.5% over the past year.
Darden isn't trying to cheat you out of the smaller profit portion, but it's as fishy as a Red Lobster on a Friday during Lent to see the company promote the per-share gain without spelling out the percentage gain on net earnings. Investors lacking calculators may believe that the casual-dining juggernaut actually expanded net margins for the period, but that's far from the truth. Even at Red Lobster and Olive Garden, the two flagship chains posting higher comps, operating margins contracted.
I have nothing against share repurchases. I love them. However, companies that have gone the Darden route to trim outstanding shares, like Chili's parent Brinker International (NYSE:EAT) and CBRL Group (NASDAQ:CBRL), can't be considered sexy growth stocks just because they're wearing tighter clothes.
There's also more to Darden's reported profitability. A favorable tax charge boosted earnings by $0.06 per share. An estimated impairment charge of $0.07 per share went into the closing of some units, but some investors may not want to discount that. Opening and shuttering eateries is part of the game when you watch over 1,450 restaurants.
It was also disappointing to see comps slip at Smokey Bones and Bahama Breeze. These were supposed to be major drivers for the company, now that the Red Lobster and Olive Garden gravy trains can't afford to expand much further. I'm a big fan of Darden's moderately upscale Seasons 52 concept, but with just seven locations, it will take years to make a big impact.
So accept Darden for what it is: a slow-moving operator. If you want growth in seafood concepts, try Landry's (NYSE:LNY) or McCormick & Schmick's (NASDAQ:MSSR). If you like Smokey Bones, go for the stand-alone BBQ play at Famous Dave's (NASDAQ:DAVE). Even a tropical concept like Bahama Breeze can be found in a higher-growth dosage through Kona Grill (NASDAQ:KONA).
Those are riskier plays, but at least you know that if they deliver on their growth potential, you can trust their meatier portion sizes.
For more on the places we love to eat, check out:
None of these stocks has been singled out in any of our newsletters. However, Inside Value readers were treated to a restaurant stock pick a few issues ago that went on to receive a buyout bid at a premium. See for yourself with full access to our archives, courtesy of a free 30-day trial.
Longtime Fool contributor Rick Munarriz enjoys eating at Olive Garden, unless he has a craving for something Italian. Ha, ha, ha. Seriously now, he really doesn't mind the place. He does not own shares in any of the companies mentioned in this story, save for CBRL Group. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
