Laudani: Digesting Darden
In late June, Darden surprised investors with a weak fourth quarter and disappointing guidance. Same-store sales fell 2%, which was below already lowered expectations. Lower costs helped the company to post a better-than-expected operating margin of 11%. Without the last minute margin boost, the company would have missed the quarter by much more than a penny. Management guided down fiscal 2013 and told investors to expect a companywide same-store comparison of just 1% to 2%.
The weak results at Olive Garden are dragging down the overall companywide comp. Olive Garden has lost market share as other restaurants have beefed up their menus and boosted ad budgets. Carrabba's, Ruby Tuesday (RT) , DineEquity's (DINE) Applebee's and even Brinker's (EAT) Chilis have all reinvigorated offerings. Olive Garden has had a poor record for the last three years. Same-store sales have bounced around all over the place. Last quarter, for example, Olive Garden posted a same-store sales decline of 1.9% -- which was better than last year's dismal 2.9% decline -- but that isn't enough to call a turnaround. This quarter's results are expected to be down between 2% and 3%. Red Lobster faces a tough comparison to last year as well.
Looking at the stock, investors don't seem too concerned about Olive Garden. They have taken comfort in the generous 4% dividend and the large share buybacks ($250 million). It doesn't hurt that Darden is one of the few investable casual dining companies, either.
But the good times are coming to an end. Darden recently announced the acquisition of a small restaurant chain called "Yard House" in an all-cash deal valued at $525 million. Because of the deal, the stock buyback will have to be scaled down to just $50 million. Management also told investors the deal would be dilutive by $0.03 to $0.05 per share. Eventually, Yard House will be accretive to earnings, but that is going have to wait a few quarters. Investors like the deal because Yard House earns a higher percentage of its profits from alcohol sales, rather than from food.