Seeking Alpha
Profile| Send Message|
( followers)  

Earnings estimates have fallen sharply for Darden Restaurants, Inc. (NYSE:DRI) following its fiscal 2014 Q4 results in June. While some of this negative earnings momentum is due to the sale of the company's Red Lobster brand, analysts have also been disappointed with continued weak results at its Olive Garden brand.

Darden Restaurants is a Zacks Rank #5 (Strong Sell) stock.

While shares of Darden are trading near their 52-week lows, the stock does not look cheap at 20x forward earnings. Investors should consider avoiding the stock until a visible turnaround is set in place.

Red Lobster Sale

Darden Restaurants owns and operates more than 1,500 restaurants under the brands Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House.

The company sold its Red Lobster chain to a private equity group in May. Red Lobster accounted for approximately 28% of total sales in fiscal 2014. The company plans to use the net cash proceeds of $1.6 billion to pay down debt and buy back stock.

Fourth Quarter Results

Darden reported disappointing fiscal 2014 Q4 results on June 20. Adjusted earnings per share came in at 55 cents, which was well below the $1.01 earned in the same quarter last year.

Total sales inched up 1% year-over-year to $2.32 billion, but same-store sales fell -3.3%, including a -5.6% drop at Red Lobster. Excluding discontinued operations (i.e., Red Lobster), sales rose 3.6% to $1.650 billion.

Same-store-sales were down -3.5% at Olive Garden but increased 2.0% at its Specialty Restaurants group.

Estimates Falling

Following fiscal 2014 Q4 results, analysts revised their estimates significantly lower for both fiscal 2015 and 2016. This was driven in part by the dilutive effect of the Red Lobster sale, but many analysts seem skeptical of any near-term turnaround in the Olive Garden brand.

Darden Restaurants is a Zacks Rank #5 (Strong Sell) stock.

The 2015 Zacks Consensus Estimate is currently $2.23, which is within management guidance. The 2016 consensus estimate is $2.46, representing 10% annual EPS growth.

Valuation

Shares of Darden are trading near their 52-week lows. But the valuation picture doesn't look very compelling at 20x 12-month forward earnings. This is a significant premium to its 10-year historical median of 13.5x.

The Bottom Line

With continued declines in same-store-sales at Olive Garden, falling earnings estimates and premium valuation, investors should avoid Darden Restaurants until a true turnaround is in place.

Disclosure: None

Source: Zacks' Bear Of The Day: Darden