EAT Brinker International Inc

Darden Restaurants Inc. (DRI) posted second quarter fiscal 2012 earnings from continuing operation of 42 cents per share, in line with the Zacks Consensus Estimate, but down from the year-ago  earnings of 55 cents. Considering the losses from discontinuing operations, earnings were 41 cents versus 54 cents recorded in the comparable quarter last year.

The closing costs of two Eddie V's restaurants acquisitions hurt its quarterly earnings per share by a penny, while the transaction is expected to be neutral to its current fiscal year earnings per share.

Total revenue grew 6.1% from the prior-year quarter to $1,831.5 million and surpassed the Zacks Consensus Estimate of $1,827.0 million. Combined same-store sales for the company’s three core brands -- Olive Garden, Red Lobster and LongHorn Steakhouse -- rose 1.8% and recorded better-than-expected growth of 0.6% as per the Knapp-Track benchmark of U.S. same-restaurant sales. The upside in revenue was also led by significant growth in Specialty Restaurant Groups and unit expansion.

Operating Highlights

By restaurant concepts, Olive Garden’s sales inched up 0.9% year over year to $836.0 million in the second quarter, driven by contributions from 28 net new restaurants, partially offset by a 2.5% decline in comps growth.

Sales at Red Lobster increased 8.3% to $602.0 million attributable to revenues from 8 net new restaurants as well as a 6.8% rise in comps.

At LongHorn Steakhouse, sales were up 13.7% at $255.0 million based on a 6.0% growth in comps. Moreover, revenues from 27 net new restaurants in the quarter also contributed to the upside.

Sales at The Specialty Restaurant Groups increased 19.1% to $137.0 million, driven by comps growth of 5.7% at The Capital Grille, 0.5% at Bahama Breeze and 2.9% at Seasons 52. The growth in revenues was also backed by the addition of one new Capital Grille restaurant, six new Seasons 52 restaurants and two new Bahama Breeze restaurants. The addition of 11 restaurants purchased from Eddie V's restaurants in November also contributed to the growth.

Financial Position

Darden ended the quarter with cash and cash equivalents of $50.2 million and long-term debt (less current portion) of $1453.3 million. In the second quarter, the company purchased 4.2 million shares of its common stock and declared a quarterly dividend of 43 cents per share.

Outlook

Orlando, Florida-based company foresees its sales outlook for fiscal 2012 in the range of 6% to 7% based on a 2% to 3% increase in the blended same-store sales estimate for its three core brands. However, the company retained its 80 to 90 net new restaurants' goal for fiscal 2012 (excluding the addition of 11 Eddie V's units).

The company now expects earnings per share from continuing operations to grow 4–7%. Underperformance at Olive Garden and higher food costs are responsible for the weak guidance.

Our Take

Darden reported in line results for the quarter and reaffirmed its outlook. However, recent woes at Olive Garden continue to nag Darden. In each month of the reported second quarter, Olive garden experienced a decline in comps with November being the worst hit.

Olive Garden's first quarter U.S. comps were also down 2.9%. Despite management's efforts to mitigate traffic erosion through promotions and lower pricing that restricted the earnings to some extent, traffic count declined in two out of the last three months.

In order to boost its failing brand – Olive Garden, Darden is taking a series of initiatives such as remodeling, promotional offers, new menu offerings across all price points and marketing programs. The flaring cost environment is also expected to cool somewhat in the second half of fiscal 2012. Additionally, sales at Darden may improve in the latter half of the current fiscal year and beyond due to easy comparisons.

Darden, which competes with Kona Grill Inc. (KONA) and Brinker International Inc. (EAT), currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.

 
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