Darden Restaurants Beats Estimates

June 23, 2009

The great 20th century writer Franz Kafka once famously quipped that, "So long as you have food in your mouth, you have solved all questions for the time being."

Ah, if only life were that simple. Unfortunately, the pedestrian act of putting food in our mouths won't help us identify the best stocks for our portfolio–or will it?

Today we got news that Darden Restaurants Inc. (DRI) easily beat consensus Street estimates, announcing adjusted net earnings from continuing operations of 90 cents per share for the fourth quarter. The Street was expecting earnings to come in at 86 cents per share. The company also declared a quarterly dividend of 25 cents per share, a 25% increase from the previous quarterly dividend.

Now the name Darden Restaurants might not be a household name, but I bet if I say the names Red Lobster and Olive Garden you'll know exactly who Darden is. In addition to lobsters and linguini, the Orlando, Fla.-based chain serves up a variety of foodstuffs from its LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52 restaurants. In all, the firm operates about 1,700 casual dining restaurants in the U.S. and Canada.

The impressive thing about Darden is they seem to have carved out a niche in the casual dining market. Equally impressive has been the company's consistent earnings growth over the past several years.

How Restaurant Stocks Are Faring Now

Of course, the one thing on every market watcher's mind right now is will the soft economy -- particularly the very spongy consumer spending data-- negatively affect consumer willingness to dine out?

To get a handle on what the current conditions are with respect to restaurant spending, I took a look at the ChangeWave Alliance Research Network's recent restaurant spending survey. The Alliance conducts targeted surveys of mostly high-end consumers to find out what they're doing, and what they plan on doing, when it comes to personal spending decisions.

In a March, 2009 survey of U.S. consumer dining habits, the Alliance found a continued tough spending environment, with restaurants remaining one of the weakest spending areas. But in a hopeful sign, the rate of decline in restaurant spending had leveled off compared to previous surveys.

Upscale and fine-dining restaurants made out the worst in the survey, while high-end casual dining establishments also showed weakness. However, casual and family restaurants, such as those run by Darden, fared better than most. When asked which individual restaurant chains they'll be spending more money at over the next 90 days, Olive Garden was one of the few establishments to post a solid improvement over previous surveys.

I think Darden Restaurants is well positioned to build on its solid earnings growth record, and I think its Red Lobster and Olive Garden brands will continue to remain popular with casual diners.

I rate DRI an A, making it a strong buy.