Darden (DRI) Shares Leaving a Bad Taste - TheStreet

At close to $61, shares of shares of Darden Restaurants (DRI) - Get Report are flat for the year to date. In my opinion, this company has nothing cooking.

Darden is expected to report first-quarter fiscal 2017 results Tuesday and expectations are fairly low. Last year, sales increased 2.5% and are projected to grow between 2% and 4% this year.

On the fourth-quarter conference call, management predicted same-restaurant sales would be up 1% to 2% with some help from pricing. Darden plans to increase menu prices about 1%.

Darden plans to open 24 to 28 new restaurants in 2017. I found total sales growth of 1.7% to 2.7% pretty disappointing, especially considering the company continues to add new locations. 

Also disappointing was the projection of EBIT expansion between 10 and 40 basis points. Over 20% of Darden's cost is protein and food prices have been falling in the mid single digits. I can't understand why food deflation hasn't dropped to the bottom line yet. In my opinion, margins should be expanding much faster

Earnings guidance calls for EPS of $3.80 to$3.90, which was below the $3.99 consensus figure.

With a total of over 1,534 restaurants, (840 Olive Garden and 470 Longhorn Steakhouses), you would think this company could generate some serious sales momentum. But Darden has been plagued by low traffic and poor repeat business. In 2014, the company sold off its Red Lobster restaurant chain.

In June 2015, pressured by an activist shareholder, Darden spun out 424 company owned restaurants into a real estate investment trust (REIT). The company also designated 64 additional properties for sale-leaseback. The transaction generated about $631 million, which the company plans to use to pay down debt and buyback stock. While the deal may have temporally popped the stock (so hedge funds could sell into it), the company is now burdened by ever increasing lease payments.

The company raised its quarterly dividend from 50 cents to 56 cents and also repurchased 700,000 shares for $45 million. Darden has another $315 million in its repurchase authorization.

In fiscal 2016, Darden was able to generate a blended same restaurant figure of 3.2%, but considering management's guidance of just 1.7% to 2.7%, it's hard to get excited by this stock. With fiscal 2017 estimates between $3.89 and $3.90, the stock is already trading around 17 to 18 times, which is a fairly typical multiple for the casual dining industry.

Darden just doesn't excite me. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.