Retail

Darden Guidance: Full Valuation For It & Peers (DRI, EAT, DIN)

Darden Restaurants, Inc. (NYSE: DRI) is experiencing what investors need to recognize as an equilibrium imbalance between unrealistic expectations and the growth realities of the economy.  Last night the company met earnings estimates but it gave a lower forecast ahead as comparable store sales in the last quarter were up only 1.4%.

Darden reaffirmed its fiscal 2011 guidance in the call.  It expects 14% to 17% earnings per share growth with a range of $3.26 to $3.35 EPS.  Thomson Reuters showed that consensus for its May-2011 fiscal year-end was $3.35, effectively a warning.

While commodity prices are a factor and while cost cutting opportunities likely need to be advanced, the breakdown of the comparable same-store sales seems to be the real culprit.  The total 1.4% gain in the quarter was only +1.4%.  The breakdown was 6.8% at Longhorn Steakhouse and 2% at Olive Garden, but Red Lobster showed a decline of -1.6%.  Unfortunately, finding lower seafood prices is going to be a tough demand.

Here is where the problem lies regardless of the guidance.  At $3.35 already expected for FY May-2011, the $50.43 close on Monday gave Darden a forward 2011 implied P/E ratio of 15.05.  With an expected 5% revenue growth and an expected 17% earnings growth, that is not exceedingly expensive for a stock.  On the other hand, it is not cheap either.  To make matters more focused, shares had a high of $50.67 yesterday and the 52-week trading range is $33.72 to $50.84.  Shares are already up 50% over the last year and the market cap is roughly $6.6 billion.  Darden did maintain its $0.32 quarterly dividend, which comes to a yield of about 2.53% as of yesterday’s closing bell price.

Brinker International Inc. (NYSE: EAT) is often considered a peer with Chili’s and Maggiano’s, but the 0.6% drop today has shares at $20.96 versus a 52-week trading range of $13.96 to $22.56 with a market cap of only $1.93 billion.  It too has risen close to 50% this year. Yesterday’s close of $21.08 and an estimate from Thomson Reuters of $1.39 for FY June-2011 gave it a 15.1 forward P/E ratio as well. Brinker yields close to 2.7% in its dividend.

DineEquity Inc. (NYSE: DIN) is also considered a peer with Applebee’s and IHOP.  After a 3.3% drop to $50.61, its market cap is $918 million and the 52-week trading range is $22.13 to $57.80.  The performance over the last year has been huge with gains of more than 100%. Thomson Reuters estimate of $3.56 for FY Dec-2010 and $3.75 EPS for 2011 comes to a mid-year blended estimate of roughly $3.65 and a close yesterday of $52.37 gave this one roughly a  forward P/E ratio of about 14.35 on an interpolated basis.

Again, the real issue here is not just the internal metrics of the company.  Shares were already fairly valued.  Established restaurant chains can cut costs here and there, but if they cut too much it generally comes right out of the customer’s dining experience.  One bad meal, or even less of an experience on more than one occasion, will drive diners to go spend their eating-out budget elsewhere.  We have already seen incredible performance in the names here and the performance has probably reached a full enough of a valuation.

Today is not about just poor report.  This is about investment dollars needing to look elsewhere for better opportunity that may not be as fully valued.  It seems likely that new investment money will await lower prices that yield better value before real interest comes back to these names in the casual dining segment of the retail food sector.

JON C. OGG

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