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Tickers in this Article: DRI, YUM, DIN, EAT
Darden Restaurants (NYSE:DRI), operator of restaurant chains like The Olive Garden, LongHorn Steakhouse and Red Lobster, did not serve up the tasty outlook analysts were looking for when the company reported is fiscal second quarter earnings. Second sales from continuing operations were up 5.2% while diluted EPS was up 26%. Overall same store sales were up a combined 1.4% thanks in part to a near 7% same store sales increase at Longhorn Steakhouse. Yet despite the quality quarter, shares in Darden got fried after the earnings news - down by over 6%.

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Past Results Are Just That
Regardless of how strong Darden's quarter was or was not, the outlook did not meet expectations. Despite a same stores sales increase of 1.4%, the company had forecast a 2% rise in same store sales. The main culprit was the company's Red Lobster division which saw same store sales decline by 1.4%. Of the company's $1.7 billion in revenue during the quarter, Red Lobster accounted for over $550 million of that figure, second only the Olive Garden. So despite the comparable sales increase of 7% at Longhorn Steakhouse, its revenue slice of $224 million had a significantly smaller weighting than Red Lobster.

Even so, the company still reaffirmed that diluted net earnings per share growth from continuing operations for fiscal 2011 will be approximately up 14% to 17%, consistent with the company's outlook at the beginning of the year.

Looking Ahead
After recovering nicely from the recession, shares in Darden were trading at a 52 week high before the 6% haircut after the quarterly announcement. With weaker same store sales than anticipated, the market's reaction is that this quarter could be a indication that business may be slowing down. I don't put too much weight on quarterly numbers. Aside from Red Lobster, all units posted quality comparable sales growth. Shares in Darden now trade for 16 times earnings and yield 2.6%. Continued economic progress could send more consumers through its restaurants doors in the coming quarters, even more so with the extension of the federal tax cuts.

Darden's wide offerings from the budget friendly Olive Garden to the higher-end Capital Grille caters to all consumers tastes and budgets. The quality dividend is also a plus. DineEquity (NYSE:DIN) has no yield and has a forward P/E ratio of 14. Yum! Brands (NYSE:YUM) yields 2.3% but its fast food restaurant concepts may not directly compete with Darden. A better comparable is Brinker International (NYSE:EAT) which operates the Chili's and Maggiano's Little Italy concept restaurants. The valuation is quite similar although the current yield at Brinker is slightly higher.

Eating Your Own Cooking
Restaurant stocks have appreciated significantly in the past year in anticipation that the economy was on a slow but stable path to recovery. With many trading at 52 week highs, the future upside potential may be limited in 2011. (Using the same strategy year after year may be comfortable, but it's not always profitable. Check out Investing In The "Road Less Traveled" May Lead To Riches.)

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