Darden Restaurants - Strong Performance In August Sends Shares To All Time Highs

| About: Darden Restaurants, (DRI)

Darden Restaurants (DRI), the full-service restaurant operator, announced its first quarter results on Friday before the opening. Shares of Darden rose some 4.5% to a fresh all time high, as investors are enthusiastic with the latest earnings release.

First Quarter Results

Darden Restaurants reported first quarter sales for its fiscal 2013 of $2.03 billion, up 4.8% on the year before. Sales were driven predominantly by new restaurant openings, totaling 103 on the year. Same restaurant sales increased by merely 0.3%. Revenues came in line with analysts expectations.

Earnings from continuing operations came in at $111.0 million, up 3.9% from last year's earnings of $106.8 million. Earnings per share rose 9% from $0.78 to $0.85. Earnings were negatively impacted by a penny as a result of the acquisition of Yard House USA. Earnings beat analysts consensus by $0.02 per share.

During the quarter, the company repurchased 1.0 million shares. Under its current authorization, management has the ability to repurchase approximately 15.5 million shares.

CEO and Chairman Clarence Otis commented on the results, "We're pleased with our very solid start to the fiscal year. With the collective strength of our brands, the considerable combined expertise and experience within the company and our ever more cost-effective support platform, we're confident that over the long-term we can successfully navigate the sales and cost volatility of our industry, as well as the inevitable ups and downs of any single business unit, to produce consistently superior value for our guests, employees and shareholders."

Segmental Information

Oliver Garden reported sales of $922 million, up 4.3% on the year. Revenues were driven by 40 new restaurant openings and a 0.3% increase in same restaurant sales. Increased pricing and a favorable menu mix were offset by a fall in restaurant traffic.

Red Lobster reported first quarter sales of $660 million, down 2.1% compared to last year. Same restaurant sales fell 2.6% as a result of weak performance in June and July. The division opened 6 new restaurants offsetting the same restaurant sales decline. Strong pricing offset a decline in restaurant traffic.

Longhorn Steakhouse reported first quarter revenues of $285 million, up 12.7%. Growth was driven by 34 new restaurant openings, and same restaurant sales growth of 3.6%. An increase in restaurant traffic and pricing was partially offset by an unfavorable menu mix.

The Specialty Restaurant Group reported first quarter sales of $163 million, up 26.4% on the year. The division reported positive same restaurant sales increases at The Capital Grill, the Bahama Breeze and Seasons 52. Furthermore 11 new restaurants were added as a result of the acquisition of Eddie V's last year.


Darden affirms its outlook for its fiscal 2013, including the impact of the acquisition of Yard House. US same-restaurant sales for Red Lobster, Olive Garden and LongHorn Steakhouse will come in between minus 1% and plus 2%. Furthermore Darden expects to open 100 to 110 new restaurants.

Total sales are expected to grow between 9 and 10%. Earnings per share from continuing operations are expected to increase between 5 and 9% from 2012's full year earnings of $3.59.

Earnings are impacted by acquisition related charges and purchase accounting adjustments, impacting annual earnings by $0.05-$0.07 per share.


Darden Restaurants ended its first quarter with $51 million in cash and equivalents. The company operates with $2.05 billion in short and long term debt, for a net debt position of around $2.0 billion.

Based on Darden's full year outlook the company is on track to generate revenues of around $8.8 billion for the full year of its fiscal 2013. Full year earnings per share are expected to come in between $3.76-$3.90.

The market values Darden Restaurants at $7.4 billion after Friday's jump in the share price. The valuation values Darden at 0.8 times annual revenues and 15 times annual earnings.

Currently, Darden Restaurants pays a quarterly dividend of $0.50 for an annual dividend yield of 3.5%.

Investment Thesis

Year to date, shares of Darden Restaurants have risen some 25%. Shares rose from $45 in January, to trade around the $50 mark for most of 2012. In recent weeks, shares rose further to $57 at the moment.

Over the past five years, shares have gained some 30%. Shares traded as low as $15 in 2008, to trade between $40-$55 over the past three years. Revenues rose some 20% from $7.2 billion in 2009 to an expected $8.8 billion in 2013. At the same time, earnings per share rose from $2.65 to $3.83, up 45%. Dividends rose 150% from $0.80 per annum to $2.00 per share.

Investors reacted favorably to the latest results. Same restaurant sales were relatively strong in August compared to the months of June and July. Furthermore, comments from CEO Otis regarding lower seafood costs offsetting higher beef prices, are regarded favorably as investors were fearful of higher input costs.

At the same time Red Lobster, the company's biggest division, will become more value-oriented, offering more items below $15. Darden Restaurants has lost customer traffic recently as competitors have lowered prices.

Investors have already seen returns of 25% this year. I guess there is little room for capital gains in the short term. Long term holders can hold on to their position, receiving a 3.5% dividend yield per year in the meantime.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.