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Takeaway: $DRI took managing earnings to a new level in 1QFY13. Declining AUV's & industry-lagging trends do not bode well for the rest of the year

Darden reported a beat this morning driven by lower tax rate($0.02-0.03), reduced labor costs as a percentage of sales, and increased promotions at Red Lobster.  Darden’s EPS came in at $0.85 for 1QF13 versus expectations of $0.83.   We are not convinced by this beat and do not believe that FY13 comparable restaurant sales guidance is within reach.  Earnings sustainability is also a question given that comparable restaurant sales are negative and labor costs are being cut so severely. 

Income Statement

  • Revenues came in 0.2% above expectations
  • Restaurant level profit beat based on significant reduction in labor and other expenses but cost of sales were not as much of a benefit as expected because of increased promotional activity
  • Operating Profit missed due to increased G&A focused in part on advertising for Red Lobster and Olive Garden
  • Net Income and EPS beat helped by the tax rate (24% versus 26% expectations) benefit of $0.02
  • Average unit volumes at the Big Three declined -1.3% year-over-year after declining -2.3% in 4QFY12

DRI SQUEEZING THE PIPS - dri income statement

The table below highlights 1QFY13 comps at Olive Garden, Red Lobster, and Long Horn versus our expectations. 

DRI SQUEEZING THE PIPS - dri comp surprise

FY13 Guidance

  • Darden guided to 1-2% blended “Big Three” same-restaurant sales growth for the year
  • Food basket inflation is expected to be in the range of 0.5-1.5%
  • Unit growth of 5%
  • Total sales growth of 9-10%
  • EPS growth of 5-9%

Red Lobster  

During the quarter, Red Lobster repeated last year’s feast promotion, offering a four course seafood meal of $14.99 but ran the initiative for three weeks longer than last year.  Rather than finishing the quarter with crab fest, as it did in 1QFY12, Red Lobster offered endless shrimp for the last two weeks of 1QFY13.  Endless shrimp was effectively pulled forward and this negatively impacted mix in August.  We estimate that Red Lobster lagged the Knapp Track Casual Dining comparable restaurant sales index by roughly 350 basis points during 1QFY13. 

DRI SQUEEZING THE PIPS - rl POD1 1

Olive Garden – “New Promotional Constructs”

Olive Garden continues to disappoint from a same-restaurant sales and operational perspective.  The same esoteric lines on new “constructs” still punctuate management’s explanation of how Olive Garden’s turnaround is going to come about.  The remodeling initiative is set to begin, in earnest, in the second half of FY13.  We expect Olive Garden to lag the industry for the remainder of the year.  In terms of expectations, the Street is expecting a rebound in comps that we do not see as likely.  Olive Garden same restaurant sales lagged the industry Knapp Track index by roughly 60 basis points.

DRI SQUEEZING THE PIPS - OG SRS

LongHorn Steakhouse

LongHorn continues to be the bright star in Darden’s sky as same-restaurant sales grew 3.6% as two promotions and the lunch menu introduced in 2QFY12 drove sales in excess of expectations.

DRI SQUEEZING THE PIPS - LH pod1

Quantitative Levels

Keith’s quantitative model shows the immediate-term TRADE range for DRI at $54.66-$57.18.

DRI SQUEEZING THE PIPS - dri levels1

Howard Penney

Managing Director

Rory Green

Analyst