Excuses, Excuses: Darden’s a Smart Company That Just Had a Dumb Quarter; We Hope
For finding ways to explain missed earnings, restaurants often offer some of the more creative excuses. The timing of Lent wasn’t conducive to eating out. A promotion for the pear and gorgonzola ravioli didn’t bring in diners like the five cheese ziti did last year. Bad weather kept customers at home. Investors are left to wonder whether these kinds of unquantifiable one-offs are just masking deeper problems.
That’s where we are with Darden Restaurants (DRI) a month after it offered all the above explanations for weak quarterly sales at its Olive Garden restaurants. Speculators can’t decide if the surprising flatness in comparable sales at its biggest business was a mere blip in growth or a reason to sell.
YCharts Pro likes Darden's strong fundamentals and relatively low share price. But is the gorgonzola flap simply hiding slow growth trends for the company?
Darden gets about 50% of its revenues from about 750 Olive Garden restaurants, with the remainder coming mainly from its Red Lobster and LongHorn Steakhouse restaurants. The company also owns a couple of smaller upscale chains.
Altogether, the restaurants performed so well in the third quarter (ended Feb. 28) that Darden raised its full-year earnings per share growth projections to 19%. That’s based on an expected 1.5% to 2% average same stores sales growth, and sales growth of about 5.5% when new restaurant openings are included.
But past performance will be little assurance to investors if Darden’s key revenue earner is on the decline. Olive Garden’s surprisingly flat sales in the past quarter were alarming because same-store comparisons are one of the best indicators of long-term growth for this kind of company. While most restaurant growth comes from opening new locations, no one wants to open new locations for a chain that’s seeing sales fade.
Darden management says Olive Garden’s sales problem – the number of people eating there fell in each month of the past quarter -- was merely the result of a misguided ad campaign. The company mailed off coupons for fancy new dishes when customers really wanted more fettucine alfredo. In an environment where promotions are big factors in sales, it’s an excuse that might prove true.
If Olive Garden really is in for a more permanent slump, Darden will rely more heavily on LongHorn and Red Lobster to keep the company growing. LongHorn saw same store sales increase a whopping 6.1% last quarter, although its sales are about one-third of Olive Garden’s. On the other hand, Red Lobster sales were essentially flat. Red Lobster is in the middle of a remodeling program management expects will perk up sales there.
It is important to note that in the past three years, Darden management has built a strong balance sheet and pretty steady earnings growth that many of its competitors found elusive.
Darden’s shares also have performed admirably since the end of 2008, and it has paid a steadily increasing dividend.
And unlike most in this industry, Darden is not whining much about the rising price of food. Darden’s profit margins tend to be better than those of the competition, and remarkably, they’re getting better.
Darden management seems particularly good at creating shareholder returns in this notoriously fickle business, so one quarter’s slip probably isn’t cause for alarm. But if Olive Garden sales growth falters again because, say, tax filings were due on Monday, or the groundhog didn’t see his shadow, take that explanation with a grain of salt. And make sure something in the Darden portfolio is growing before you buy.
Read more articles about: Company Analysis
- stocks that look cheap
- pharma stocks
- tech stocks
- stocks that look pricey
- money managers
- value investing
- retail stocks
- dividend growth
- income investing
- energy stocks
- stock buybacks
- growth stocks
- earnings season
- warren buffett
- bank stocks
- stock screener
- short sellers
- dividend yields
- dividend yield
- interest rates
- healthcare stocks
- junk bonds
- executive compensation