Several analysts lowered their price targets for Darden Restaurants Inc. Wednesday after the casual-dining company announced in its outlook for the first-quarter that earnings would not meet expectations, based on weak results at Olive Garden and the impact of Hurricane Irene.
But even while Darden said earnings for the quarter would slip by two cents per share, analysts generally said they remain encouraged by Orlando, Fla.-based Darden’s overall performance.
Preliminary first-quarter U.S. same-store sales in June, July and August were mixed for Darden’s three largest brands. Red Lobster rose 10.7 percent, LongHorn Steakhouse was up 4.8 percent, and Olive Garden declined 2.9 percent.
Darden’s three specialty restaurants — Seasons 52, Bahama Breeze and The Capital Grille — had a combined same-store sales increase of 5.1 percent.
Full-year same-store sales for fiscal year 2012 are expected to increase a collective 3 percent for Red Lobster, Olive Garden and LongHorn Steakhouse, Darden said.
The company expects to open about 80 to 90 net new restaurants in fiscal year 2012, which is expected to drive total sales growth of between 6.5 percent and 7.5 percent, Darden said.
Darden also expects net earnings in fiscal year 2012 to be near the low end of its previously announced range of 12 percent to 15 percent.
The company said first-quarter sales took a hit from Hurricane Irene, which caused a total of 151 days of restaurant closures across all restaurants. For the quarter ended Aug. 28, August was the slowest month for same-store sales increases for both Red Lobster and LongHorn Steakhouse.
Red Lobster same-store sales for August rose 5 percent, compared with 19.9 percent in June and 5.8 percent in July. At LongHorn Steakhouse, same-store sales increased 3.5 percent in August, compared with a 6.5-percent increase in June and 4-percent rise in July.
Olive Garden same-store sales dropped throughout the quarter. They were down 3.1 percent in June, 3.5 percent in July and 2.1 percent in August.
Clarence Otis, Darden chief executive, said Olive Garden’s results “were below our expectations.”
But, he noted, “We are responding aggressively to Olive Garden’s sales opportunity, and we’re confident in our plans for what continues to be one of our industry’s strongest brands.”
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Here are four financial analysts’ takes on Darden.
• Andy Barish, Jefferies & Company Inc.: “Although diminishing, DRI still offers some of the best visibility in casual dining. Admittedly, recent weakness at [Olive Garden] comes as a surprise, and suggests that the turnaround at its core Italian brand may take longer than expected.
“We remain optimistic, given Darden's impressive momentum at its key development vehicles [LongHorn Steakhouse and the specialty restaurant group] and strong acceleration in underlying trends at DRI's most challenged and economically sensitive brand [Red Lobster].”
• Stephen Anderson, Miller Tabak + Co. LLC: “Although recent market jitters and Hurricane Irene have clouded the near-term industry outlook, we still are encouraged by DRI’s overall performance, and think a combination of market share gains and cost savings will continue to contribute to low-to-mid-teen EPS growth in the next couple of years.”
• Brad Ludington, KeyBanc Capital Markets Inc.: “We are encouraged by surprising strength at Red Lobster [+10.7 percent same-store sales in the quarter], a $100-million increase to share repurchase expectations in fiscal year 2012, and our belief that Olive Garden issues are temporary.
“Management stated in the release that it is aggressively responding to Olive Garden's sales trends, and we believe a few successful promotions back-to-back could go a long way in steadying the ship, as may already be indicated by a sequential improvement in same-store sales in August, despite the strain of Hurricane Irene.
“We expect this to be a temporary setback for Olive Garden and view shares as very attractive, with a 3.7-percent dividend yield for what is a best-in-class operator.”
• Bob Derrington, Morgan Keegan: “We have lowered our 12-month price target on DRI to $56 from $60 … However, we continue to believe DRI offers one of the best combinations of dividend yield, unit growth and attractive valuation in the industry.
“In addition, given its industry-leading position in casual dining; well-differentiated, market-dominant brands; strong management team; and significant free-cash-flow generating businesses, we argue that DRI deserves a premium valuation relative to most casual dining peers, adding further upside potential to our target price.”
Darden expects to release its 2012 first quarter earnings Sept. 28.
Contact Alan Snel at [email protected].
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