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DRI Shares Slide on Earnings Miss

NEW YORK (TheStreet) - Darden Restaurants (DRI - Get Report) closed down more than 7% lower, weighed down by lower-than-expected second-quarter results, released early on Friday.

By the end of trading, 6.3 million shares of Darden changed hands compared to its average daily volume of 1.26 million. Overall, Darden lagged the S&P 500 which was down 0.72%. 

For the quarter ended Aug. 25, Darden reported earnings of 53 cents a share, a 37.6% decrease compared to the year-ago quarter. Earnings rang in at $70.3 million, significantly lower than $111 million for the first quarter a year earlier. Same-restaurant sales increased 3.2% at LongHorn Steakhouse, but sales at Olive Garden and Red Lobster fell 4% and 5.2%, respectively.

"Sales volatility is amplified because of the changes we're making at our two largest brands [Olive Garden and Red Lobster]," Darden CEO Clarence Otis said in a company press release. "August was a challenging month on an absolute basis and we have to be prepared for consumers to continue to be cautious in their spending."

Must Read: BBRY and Investors See Red on Second-Quarter Results

The company said it is prepared to take steps to reduce costs by $50 million a year namely through labor and program spending cuts.

Otis commented, "With the additional flexibility we have as a result of these actions... we are confident we can deliver stronger operating and financial results and remain the industry leader for years to come."

Darden also announced President and COO Drew Madsen's retirement effective at the end of the company's second quarter. Gene Lee, president of Darden's Specialty Restaurant Group, will assume the role. During Madsen's six-year tenure, the company saw a 79% increase in annual revenues and delivered a 110% increase in total shareholder return.

TheStreet Ratings team rates Darden as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate Darden (DRI) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had somewhat weak growth in earnings per share."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • Darden's revenue growth has slightly outpaced the industry average of 3.5%. Since the same quarter one year prior, revenues rose by 11.3%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has increased to $259.6 million or 22.68% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 7.26%.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market on the basis of return on equity, Darden has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
  • Reflecting the weaknesses we have cited, including the decline in the company's earnings per share, Darden has underperformed the S&P 500 Index, declining 9.61% from its price level of one year ago. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.

Written by Keris Alison Lahiff.

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