Darden Restaurants has
so successfully reduced investors' appetites that even last Friday's
meager results were enough to send the company's shares modestly
higher. Happily, more sustenance could be on the way.
First, the morsels that
the owner of Red Lobster, Olive Garden, and LongHorn Steakhouse
doled out last week: It reported that fiscal third-quarter sales
rose 4.6%, to $2.26 billion, but that was due to new restaurant
openings and last year's acquisition of Yard House, a beer and
burger chain. Earnings fell 18%, to $134.5 million, as did earnings
per share, which came in at $1.02. Same-store sales at its three
biggest and best-known chains dropped 4.6%, dragging down margins
More important, however, the company is following a new operating
recipe designed to reverse the margin contraction and earnings
declines that have pulled the shares down 13% from last fall's peak.
In addition to cost-cutting, it wants to slow the growth of some of
its more mature brands while pushing harder on its newer,
faster-growing chains. Some think the company isn't going far enough
and that more changes could unlock a roughly 35% gain in the stock
over the next year or two.
Darden (ticker: DRI) took pains to tamp down expectations
at a February analyst meeting. By last week's report, analysts
expected the company to report $1.01 a share, down from the $1.13 a
share they'd been anticipating prior to the sessions with the
company. Similarly, analysts now project fiscal 2013 earnings of
$3.16 a share, down from about $4.10 a year ago.
investors chose to focus on the fact that the fiscal third-quarter
results were a penny better than the lowered forecasts. They also
took note when executives alluded to recent comments from industry
tracker Malcolm Knapp, who has been upbeat about March results at
U.S. restaurants. That would be a welcome break from February, when
casual-dining restaurant sales were down 5.4% industrywide, hurt by
higher payroll taxes, poor weather, and higher gas prices.
Darden gets the largest share of its revenue from Olive Garden,
whose 818 restaurants contribute 44% of sales. The chain's falling
same-stores sales were a concern when we wrote positively about the
company a year and a half ago ("Darden
Offers Investors a Tasty Treat," Nov. 14, 2011), and they remain
a worry today. Red Lobster, with 705 outlets, kicks in 32% of
revenues, and LongHorn's 416 restaurants generate 14% of revenue.
The latter have held their market positions.
Darden is working to
turn around its largest brands by limiting the extent of menu-price
increases and reducing the number of new restaurants. For example,
Olive Garden will open 15 new stores in fiscal 2014, down from 36
this year. The company already has kicked off a cost-cutting program
that has resulted in about $130 million in annual savings, which
will grow to $170 million to $195 million a year.
wants to promote its smaller, lesser-known but faster-growing
brands. In addition to Yard House, they include Bahama Breeze, Eddie
V's, Capital Grille, and Seasons 52. With mostly positive same-store
sales and room to open new restaurants, the specialty group now has
168 restaurants that represent about 10% of sales.
The Bottom Line
If Darden cuts menu
prices and costs, its shares could rise 35% to $66.