(DRI) Darden Restaurants 2011 Fourth Quarter Earnings Preview

Darden Restaurants Inc. (DRI) is slated to release its fourth quarter 2011 earnings on June 30, after market closes. The current Zacks Consensus Estimate is 99 cents for the fourth quarter (reflecting a year-over-year growth of 15.65%).

Darden has outperformed the Zacks Consensus Estimate thrice and missed once in the last four quarters. The average earnings surprise was a positive of 1.50%.

Third Quarter Flashback

Darden’s third quarter fiscal 2011 earnings of $1.08 per share were ahead of the Zacks Consensus Estimate of $1.05 and grew 13.7% year over year.

Total revenue spiked 5.5% from the prior-year quarter to $1,976.8 million and exceeded the Zacks Consensus Estimate of $1,969.0 million.

Combined same store sales for the company’s three core brands, namely Olive Garden, Red Lobster and LongHorn Steakhouse, rose 0.9%.

Guidance

Darden nudged up its 2011 earnings per share growth target to 19% year over year from the prior range of 17% to 18%, based on overall sales growth expectation of 5.5%, approximately 1.5% to 2.0% blended same store sales growth for the core three brands and 70 to 75 net new restaurant openings over the year.

Estimates Revisions Trend

Estimates have not budged in the last 30 days implying that the analysts do not see a significant upside in earnings for the near term. The current Zacks Consensus Estimate is $3.41 for 2011, reflecting year-over-year growth of 17.17%. For 2012, the Zacks Consensus Estimate is $3.83, reflecting year-over-year growth of 12.25%.

Agreement of Analysts

No analyst has changed the estimate for the fourth quarter and fiscal 2011 in the past 30 days. This provides no clear directional movement.

Magnitude of Estimate Revisions

In the last 30 days, the Zacks Consensus Estimates have remained stable at $3.41 for fiscal 2011 and $3.83 for 2012.

Our Take

We expect Darden to generate fourth quarter earnings in line with the Zacks Consensus Estimate.

We prefer Darden Restaurants’ strong value proposition, menu improvements, remodeling programs (especially at LongHorn Steakhouse and Red Lobster), excellent unit-level execution with differentiated brands and expansion plan. LongHorn Steakhouse will likely deliver strong results in the upcoming quarter.

For the fourth quarter, management anticipates that sales leveraging and additional cost savings will lead to lower year-over-year restaurant expenses on a percentage of sales basis. Most of the commodity requirements locked in for 2011 augurs well for its cost-saving initiatives.

However, the company is not completely immune to challenges. While Red Lobster is wooing customers with a number of promotional activities, rising sea food costs may restrain the concept’s margins. Although Olive Garden (another core brand of Darden) bounced back in the first half of 2011 after a decline in 2010, the rebound was modest.

We have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

Darden’s primary competitor Dine Equity Inc. (DIN) will release its second quarter 2011 earnings on August 3, 2011.

DINEEQUITY INC (DIN): Free Stock Analysis Report

DARDEN RESTRNT (DRI): Free Stock Analysis Report

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