DRI - THE UNTHINKABLE SHORT IS NOW REALITY

Darden surprised some people today by guiding to -3%-to-+3% EPS growth in FY14 versus consensus of +11%.  We are awaiting further insight from the second day of the Analyst Meeting tomorrow but, needless to say, the Analyst Meeting, thus far, is confirming our bearish stance on Darden.

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Below are some general thoughts, with charts, on the guidance offered by management after day one.  We will have more detailed comments on individual brands and the minutiae of management’s strategy, following the second day’s presentation tomorrow.  

Expectations Taking a Beating

Darden’s share price gained on Friday as investors covered on the news that EPS guidance for FY13 was being revised to $3.06-3.22.  Consensus is now seeking $3.24 in EPS this year.  We are at the low end of the guided range.

During the first day of the Analyst Meeting, management gave consensus expectations another thrashing, guiding to -3% to +3% EPS growth in FY14, versus consensus of +11%. 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - dri eps guide

Could Go Lower – Traffic Assumptions Likely Aggressive

It seems to us that Darden’s management team may be overly optimistic in its underlying assumptions behind the FY14 earnings growth. 

Over the near-term, which we took to mean the next 2-3 years, the company is guiding to same-restaurant sales growth of 1-2%, comprised of 1% check growth, 0-1% traffic growth.  The company’s unit growth of 4% is expected to drive sales to roughly 6% per year, with the exception of FY14 when the Yardhouse acquisition should boost that number by 1%. 

We believe that the traffic assumptions are likely aggressive.  The past seven years have seen negative comparable traffic growth for the industry.  Looking at the trend of Darden’s largest two brands’ traffic performance versus industry peers, it could be a stretch to get to positive traffic growth (on a sustained basis) any time soon. 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - Olive Garden Gap to Knapp Traffic

 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - Red Lobster Gap to Knapp Traffic

 

DRI -  THE UNTHINKABLE SHORT IS NOW REALITY - dri gap to knapp

Howard Penney

Managing Director

Rory Green

Senior Analyst