Darden Restaurants Earnings Preview: Fiscal Fourth Quarter 2009

Darden Restaurants [[DRI]] is scheduled to report their fiscal fourth quarter 2009 results after the market closes on Tuesday, June 23. Based on our analysis, we at EarningsPreviews.com are expecting DRI to report quarterly results that will likely beat Wall Street’s consensus expectations.

 

Analyst Expectations

We are forecasting revenues of $1.99 billion and EPS of $.88. This would represent a 9% increase in revenues from last year’s $1.83 billion in the same period. The current analyst consensus estimates calls for revenues of $1.98 billion and EPS of $.86. On March 17, the company provided updated fiscal 2009 guidance which implied fourth quarter EPS of $.82 – $.90.

 

The restaurant sector has performed reasonably well in 2009 and we feel that Darden Restaurant’s best-of-breed offerings will continue to outperform the sector. The Red Lobster and Olive Garden brands continue to remain popular with casual diners despite lower-cost alternatives that are often available to consumers. The brands continue to build strong customer loyalty through effective advertising & promotional activity.

 

While we are expecting solid fourth quarter results, we anticipate that the company’s fiscal 2010 guidance may disappoint Wall Street. Currently, analysts are expecting DRI to grow earnings by 7% in 2010 after posting a 1% decline in 2009. However, these assumptions are generally based on strong economic recovery occurring in the second half of 2009. While there are signs of improvement in the economy, we believe the road to full recovery could be longer than many anticipate. In addition, rising gas prices could negatively impact consumers discretionary spending in the coming months.

 

Share Performance

Since the beginning of the year, Darden Restaurant’s shares are up over 17%. In 2008, DRI’s shares gained less than 2%, but performed quite well compared to as the 34% decline in the Dow Jones industrial average.

 

Valuation

Shares are now trading at 11x consensus fiscal 2010 EPS estimates. This is below the relative valuations of their peer group. Darden’s shares have fallen 20% since hitting a 52-week high in April. We would expect restaurant stocks to continue to drop as the market corrects for their rapid rise in March-April.

 

Recommendation: Hold with a $35 price target.

 

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