Darden Restaurants, owner and operator of the Red Lobster, Olive Garden, Longhorn Steakhouse and three up-and-coming restaurant concepts, opened the first quarter of its fiscal year with strong sales growth. Higher food costs and Tropical Storm Irene hurt the bottom line, but the company's consistent long-term track record remains fully intact. With a low valuation and 3.6% current dividend yield, the stock is worth a close look.
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First Quarter Recap
Total sales advanced 7.5% to $1.9 billion. Of the three primary concepts, Red Lobster sales (35% of total sales) growth was the strongest at 12.3% and stemmed from impressive same-store sales growth of 10.7% and the addition of five net new stores. Longhorn Steakhouse sales (13% of total sales) grew a similarly strong 12.1% on 4.8% comp growth and 23 net new locations. Olive Garden (46% of total sales) eked out 0.8% growth on the opening of 30 net new restaurants and had negative comps of 2.9%. The fourth segment is known as the specialty restaurant group (about 7% of total sales), and it saw sales jump 20.7% on strong trends at the three concepts of Capital Grille, Bahama Breeze and Seasons 52. (For related reading, see How To Analyze Restaurant Stocks.)

Despite the solid top-line trends, operating income fell 7.6% to $147 million. Management cited higher commodity costs, which came through as a 17% jump in food and beverage expenses. It did what it could to control corporate overhead, as SG&A expenses rose only 1%. Lower income tax expense helped temper the net income decline to 5.7%, as earnings fell to $106.6 million. Share buybacks also tempered the per-share earnings decline to 2.5%. Diluted EPS came in at 78 cents but would have been a couple of cents higher were it not for Tropical Storm Irene. Free cash flow was negative, as capital expenditures of $138.2 million exceeded operating cash flow production of $118.3 million. (For related reading on free cash flow, see Analyze Cash Flow The Easy Way.)

Outlook
For the full year, Darden management said to expect sales growth between 6.5% and 7.5%, and earnings growth in a range of 12% to 15%. Analysts currently project sales growth of 6.5%, total sales of $8 billion and earnings of $3.79 per share. This places the forward earnings multiple in very reasonable territory at 11.5.

Bottom Line
Despite the weak first quarter profit trends, over the past three- and five-year periods, Darden has consistently leveraged annual mid-single digit sales growth into annual profit growth close to 10%. The average record over the past decade is even stronger, as sales are up 6.4% and earnings are up 12.3% annually. Rivals, including Ruby Tuesday (NYSE:RT) and Cracker Barrel (Nasdaq:CBRL), should take note of Darden's consistent track record.

This suggests that growth has become more challenging in recent years. However, the period includes a severe recession, and acquisition of Rare Hospitality back in late 2007 has added a couple of new growth concepts in Longhorn and Capital Grille, the latter of which competes with Morton's Restaurant Group (NYSE:MRT) and Ruth's Hospitality Group (Nasdaq:RUTH) in the high-end steakhouse market. Seasons 52 also has appealing growth prospects and serves a market seeking healthier dining alternatives. Recent growth at Red Lobster has also been impressive and demonstrates that Darden is capable of keeping its more mature concepts fresh in consumers' eyes.

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