Dumping Red Lobster Did Not Help Darden’s Results

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Darden Restaurants Inc. (NYSE: DRI) reported fourth-quarter and full-year fiscal 2014 results before markets opened Friday. The operator of Olive Garden, Longhorn Steakhouse and other restaurant chains reported quarterly diluted earnings per share (EPS) of $0.65 on revenues of $2.32 billion. In the same period a year ago, Darden reported EPS of $1.01 on revenue of $2.3 billion. Fourth-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.94 and $2.33 billion in revenue.

For the full year, Darden posted EPS of $2.15 on revenues of $8.76 billion, compared with EPS of $3.13 on revenues of $8.55 billion in fiscal year 2013. The consensus estimate called for EPS of $2.46 on revenues of $8.77 billion.

In May, Darden announced the sale of its Red Lobster restaurants to private equity firm Golden Gate Capital for $2.1 billion. Red Lobster’s results are included in this earnings report as discontinued operations. In the fourth quarter, Red Lobster’s sales totaled $664 million, down 5.6% year-over-year. For the full year, sales fell 6.2% to $2.46 billion. The average annual sales per restaurant totaled $3.5 million, and U.S. same-store sales fell 6% compared with the prior year.

Of the expected net proceeds of $1.6 billion from the sale of Red Lobster, the company plans to use $1 billion to pay down debt and $500 million to $600 million to buy back shares in its new $700 million share repurchase plan. The company also expects to maintain its $2.20 annual dividend (4.4% dividend yield).

Darden did not provide guidance for fiscal 2015, saying it will discuss its outlook during the conference call. The consensus analyst estimates call for first-quarter EPS of $0.62 on revenues of $2.25 billion. For the full year, EPS are estimated at $2.79 on revenues of $9.01 billion.

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When the Red Lobster sale was announced, a group of shareholders including private equity firms Starboard Value and Barington Capital Group objected both because they believed the price was too low and because stockholders got no say in the transaction. Barington called the deal a “fire sale.” Starboard questioned the impact of the sale on Red Lobster’s real estate holdings, although Darden executives said a sale-and-leaseback deal with American Realty Capital Properties allows Darden to realized value from the real estate.

The good thing about the sale is that it rids Darden of its largest underachieving chain. The company’s smaller chains have performed better, even though Olive Garden’s same-store sales and traffic were down for the quarter. The company’s specialty restaurant posted a sales boost of nearly 16% and same-store sales rose at three of the four chains.

Darden shares were down about 3.5% in premarket trading Friday, at $47.80 in a 52-week range of $44.78 to $54.89. Thomson Reuters had a consensus analyst price target of $52.00 before the results were announced.

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