March 23--Have things gotten as bad as they're going to get for Darden Restaurants?
After two quarters of falling profit, the Orlando-based company's performance should improve slowly as the casual-dining industry recovers from a bleak winter, some analysts say.
Sales declines appear to have "bottomed out in the quarter they just reported," said Mark Kalinowski, a Janney Capital Markets restaurant analyst who just recently began suggesting that clients buy Darden's stock.
Darden's stock rose 1.35 percent Friday to $49.62 a share after the Fortune 500 company announced an 18 percent drop in third-quarter profit to $134.4 million, or $1.02 a share. It had warned Wall Street of the disappointing financials last month.
Sales at Olive Gardens, Red Lobsters and LongHorn Steakhouses open for at least 16 months declined 4.6 percent during the quarter, which ended Feb. 24. But Darden noted Friday that, after trailing the rest of the industry for most of the past year, a drop in customer visits to its major chains were in line with the rest of the business during the most recent quarter.
Sit-down restaurants in general are losing diners to quicker, cheaper chains, a situation made worse earlier this year by higher gas prices, colder weather and the end of temporary reductions in federal payroll taxes. But restaurant-industry results for March indicate "that consumers have adjusted," Darden Chief Executive Officer Clarence Otis told analysts Friday.
Still, Darden has unique challenges, starting with Olive Garden, which has grown stale for many people. The chain is now planning a broad range of improvements.
Darden's stock price has dropped 10.6 percent during the past six months, from $55.52 to $49.62 at the market's close on Friday. But it has rallied with the rest of the market in recent weeks, up from $46.23 a month ago.
Analyst Howard Penney of Hedgeye Risk Management has for several months recommended "shorting" Darden stock, a strategy that pays off if the price declines further. But he changed his advice to clients earlier this month, recommending they buy Darden shares and hold on to them in anticipation of rising prices.
"It can't get any worse," said Penney, who has been highly critical of the company's financial performance. Any more big disappointments, he said, could even lead to Otis' ouster and a new direction for the company. A Darden spokesman said the company does not comment on analysts' speculation.
"It's a win-win scenario as I see it," Penney said of the company's stock. "It's now evident that certain things need to change and, if there's continued underperformance, management's going to go, but if they do actually fix it, it's going to [improve]."
The stock's quarterly dividend of 50 cents a share -- a dividend yield of about 4 percent that's considered high for a restaurant stock -- has helped the stock's performance, Morningstar Inc. restaurant analyst R.J. Hottovy said.
Darden says it is committed to keeping and increasing its stock dividend. One way it plans to do that is by cutting restaurant construction expenses, slowing down Olive Garden's growth as it works on improving the chain.
Darden has already reset its financial expectations. It projects that earnings this fiscal year, which ends in May, will fall between $3.06 and $3.22 a share, down from $3.58 in fiscal 2012. As for fiscal 2014, its projections range from a 3 percent increase in earnings to a 3 percent decline.
"It's a company that everyone on Wall Street understands has big challenges they're trying to overcome," Kalinowski said.
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