Last night DRI reported significantly better 2Q10 EPS of $0.43 versus my $0.39 estimate. As I said in my preview note, “the extent to which commodity costs prove favorable on a YOY basis is the biggest question mark and could provide some upside to my numbers.” With comparable sales coming in slightly worse than my expectations, the earnings upside did, in fact, come largely from lower food costs. My concerns for DRI and the industry in general are grounded in top-line demand and were well placed as it relates to the quarter DRI just reported.
Reported same-store sales declined 1.4% at Olive Garden, 8.4% at Red Lobster and 6.2% at LongHorn Steakhouse. Relative to my expectations, these results are in-line at the Olive Garden, worse at Red Lobster and better at LongHorn. These results include the impact of a shift in the Thanksgiving holiday week, which moved to the fiscal second quarter this year from the fiscal third quarter last year. Excluding the effect of the holiday shift, U.S. same-restaurant sales decreased 0.7% at Olive Garden, 7.6% at Red Lobster and 5.0% at LongHorn Steakhouse.
Darden announced that it expects reported diluted net earnings per share growth from continuing operations of flat to +4% in fiscal 2010 versus the previous guidance of -2% to +8% (said last quarter that the lower half of the diluted net earnings per share range is more likely than the upper half of the range).
While the expected range of earnings in fiscal 2010 is slightly better, the top-line trends continue to slow for DRI with the company lowering its full-year blended same-store sales guidance range to -3% to -4% from flat to -3%. Going back to my industry note from 12/01/09 titled “CASUAL DINING – ONE OF THESE THINGS IS NOT LIKE THE OTHERS,” the market is not paying up for slowing sales trends. DRI’s full-year earnings outlook is better than the company anticipated in September due to lower food costs, but our Restaurants 2010 double-edged sword thesis suggests that this will come to an end sooner rather than later.