Buy Darden Restaurant Shares On Today's Revenue Miss

| About: Darden Restaurants, (DRI)
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Darden Restaurants (NYSE:DRI), the largest full service restaurant operator in the United States, reported fourth quarter and full year earnings before Friday's market open. Shares have traded down around 1-2% during today's trading session. Shares are now approaching positive territory as the week comes to a close.

For the fourth quarter, Darden Restaurants reported earnings per share of $1.15. Net earnings were reported as $151.6 million on $2.07 billion in sales. Sales increase 3.8% from last year, while earnings per share were up 15%. Same store sales from the company's Specialty Restaurant Group, along with new restaurants, powered sales higher.

The Specialty Restaurant Group saw same store sales improve 2.7% for the quarter, while the company's core three restaurants (Olive Garden, Red Lobster, Longhorn Steakhouse) saw a decline of 1.9%. For the full fiscal year, both segments saw same store sales growth, with the Specialty Group +4.6% and the core three restaurant groups posting +1.8% growth. Same store sales for the company's restaurant brands are shown for the fourth quarter below (with full year in parenthesis):

  • Olive Garden: -1.8% (-1.2%)
  • Red Lobster: -3.9% (+4.6%)
  • Longhorn Steakhouse: +3.0% (+5.3%)
  • Capital Grille: +2.8% (+5.3%)
  • Bahama Breeze: +2.8% (+3.4%)
  • Seasons 52: +1.9% (+3.8%)

Earnings per share for the full fiscal year were $3.58. Full year net earnings were $476.5 million, versus $478.7 million in the previous fiscal year. Total sales for the fiscal year were $8.0 billion, a 6.6% increase for the company. Analysts had called for revenue of $8.04 billion. While the company missed on full year predicted sales, the company met earnings per share estimates of $3.58.

Sales by restaurant for the fourth quarter and (full year) were:

  • Olive Garden: $904 million ($3.58 billion)
  • Red Lobster: $681 million ($2.67 billion)
  • Longhorn Steakhouse: $297 million ($1.12 billion)
  • Specialty Restaurant Group: $179 million ($623 million)

The company raised its quarterly dividend payout to $0.50. This is a 16% increase from the previous $0.43. The company has been raising its quarterly payout to return profits to shareholders. Shares now yield around 4%. Along with dividends, the company has been actively buying back shares, buying back 0.4 million shares in the fourth quarter. During the full fiscal year, the company bought back 8.2 million shares of its stock.

The company added 89 new restaurants in the fiscal year. Darden added 38 Olive Gardens, 6 Red Lobsters, 32 Longhorn Steakhouse, 2 Capital Grilles, 4 Bahama Breezes, and 6 Seasons 52s. Darden intends to open 100-110 new stores in fiscal 2013, with a much more aggressive expansion plan in place. In April, Darden Restaurants entered into an agreement with Restaurant Operators Inc. The deal will expand on the company's already existing base of Longhorn Steakhouse's in Puerto Rico. Restaurant Operators will open three Longhorn and 8 Olive Gardens on the island in the next five years.

The company's outlook for 2013 is 1-2% growth for the main three restaurants and total sales growth of 6-7%. The increase in sales would represent a dollar figure of $480-$560 million. Earnings per share are expected to grow 8-12%, representing figures of $3.87-$4.01. Estimates on Yahoo Finance call for earnings per share of $4.06 during fiscal 2013. The company remains cautious with its guidance and said that the company still faces "slow and uneven recovery in both the economy and our industry."

I highly recommend viewing the presentation for Darden's Analysts and Investor Meeting from February 24th, 2012. Inside the presentation is a well laid out plan for the next five years. Among some of the highlights are:

  • Goal to add $3-$4 billion in annual revenue over the next five years
  • Set to add $2-$3.50 in annual earnings per share
  • Goals by restaurant for annual sales: Olive Garden $4.7 billion, Red Lobster $3.2 billion, Longhorn Steakhouse $1.9 billion, Specialty $1.2 billion
  • Grow units from 1894 (fiscal 2011) to 2425 in 2016
  • Rapidly expand Longhorn Steakhouse across the United States. As of February, there were 376 and Darden believe there is the potential for 600-800.
  • Add 44-48 Longhorn Steakhouse stores in 2013, add to new markets as there are none west of Texas

If Darden can meet its goals for earnings per share growth, it sets up for 2016 posting earnings per share of $5.85-$7.35. I think shares look expensive at $50 a share, but they are trading at about 12 times next year's guided earnings. The company is expanding rapidly and new international deals like the one in Puerto Rico could accelerate earnings even further.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DRI over the next 72 hours.