Darden Restaurants Inc. (NYSE: DRI). We think that Darden continued to show improvement in fiscal 2Q21, with a more moderate decline in comp sales (down 20.6% after a sharper drop of 29% in 1Q21) and above-consensus EPS. We think this guidance is achievable as the company has now reopened about 90% of its restaurant dining rooms (albeit at limited capacity), and continues to benefit from efforts to expand takeout and delivery orders and simplify its menu. We also expect Darden to continue its record of positive earnings surprises over the past six quarters.
On December 18, Darden reported 2Q21 adjusted EPS of $0.74, down from $1.12 in the prior-year period but $0.02 ahead of consensus. The earnings beat was due in part to a decline in labor costs. On a GAAP basis, Darden earned $0.73 per share, up from $0.20 in the prior-year period. Hurt by the continued increase in coronavirus cases, total sales fell 19% to $1.66 billion, below the consensus estimate of $1.69 billion. Revenue reflected a same-store sales decline of 20.6%, versus the consensus call for an 18.3% decline. This decline was offset in part by the addition of 19 net new restaurants.
In 3Q21, DRI expects total revenue to equal 65%-70% of 3Q20 revenue, with EBITDA of $170-$210 million. Based on a weighted-average share count of 132 million shares, it expects diluted EPS of $0.50-$0.75.
In FY21, Darden expects to add 35-40 restaurants and invest $250-$300 million in capital projects.
In FY20, total sales decreased 8% to $7.8 billion and adjusted diluted EPS fell to $3.13 from $5.82 in FY19.
EARNINGS & GROWTH ANALYSIS
Darden organizes its portfolio of restaurants into the following categories: Olive Garden (50% of FY19 sales), LongHorn Steakhouse (21%), Fine Dining (7%) and Other Business (21%).
Blended same-store sales at Darden’s brands fell 20.6% in 2Q21, down from 2.0% growth in 2Q20. Comp sales fell 19.9% at Olive Garden (270 basis points weaker than consensus); and 11.1% at LongHorn Steakhouse (30 basis points better than consensus). Same-store sales in the Fine Dining segment were down 31%.
Management keeps a close eye on costs. In 2Q21, despite a $98 million decline in food and beverage costs and a $156 million decline in labor costs, the operating margin fell to 7.3% from 7.8%.
FINANCIAL STRENGTH & DIVIDEND
Long-term debt as a percentage of total capital decreased to 27.5% at the end of
2Q21 from 28.5% at the end of FY20. Given the company’s low debt and line of credit, we think that Darden is well positioned to overcome the current weakness in the casual-dining segment. Standard & Poor’s rates Darden’s credit as BBB, an investment-grade rating. The company also has investment-grade ratings from Moody’s and Fitch.
To provide liquidity, the company recently drew $750 million from its revolving credit line.
In the fiscal 1Q earnings release, the company reinstated its quarterly dividend.
We are maintaining our dividend estimates of $0.90 for FY21 and $1.60 for FY22.
MANAGEMENT & RISKS
The CEO of Darden is Eugene I. Lee, Jr. He has served in the position since 2015. Ricardo Cardenas has served as CFO since 2016.
Darden faces the risk that the coronavirus pandemic and weak economic conditions could lead to further reductions in restaurant spending. Like other restaurant companies, Darden could also be hurt by rising food and beverage costs as well as by increases in the federal minimum wage.
On December 22, BUY-rated DRI closed at $119.54, up $2.62.