The long-term risk/reward profile of Darden Restaurants Inc.'s
) looks attractive as a significant seafood cost headwind-to-tailwind reversal could provide a nice acceleration to fiscal 2013 EPS growth back to the mid teens with potential upside.
Meanwhile, investors remain heavily focused on Olive Garden (OG) sales trends as management works to reverse recent underperformance through a new promotional strategy, future core menu changes (first in eight years), a new advertising approach and store reimaging.
After a promotional hiatus, OG will roll out the "Taste of Tuscany" this week which is consistent with the promotional strategy shift towards highlighting engaging platforms, not one or two dishes. This began with the recent $12.95 three-course dinner which provided guests an array of options and was accretive to average check and operating profits.
In addition, Seafood costs accounts for 1/3rd of the company's food basket and could reverse from a double-digit headwind in fiscal 2012 to deflation in fiscal 2013. This could provide a much needed profit boost as Red Lobster faces difficult sales comparables.
"We expect EPS growth near 16% in F13 with upside if OG outperforms," Oppenheimer analyst Brian Bittner wrote in a note to clients.Meanwhile, avenues for growth are likely to remain focused on unit expansions at Longhorn Steakhouse and the Specialty Restaurant Group (particularly Seasons 52).
Any needle mover acquisition would have to provide a combination of leverage-able scale, yet a meaningful growth runway, which leaves a short list of opportunities.
Over the next few quarters, labor could leverage 10-30 basis points as the restaurant operator laps cost initiatives. The company addressed the potential Healthcare Bill and believes it's positioned to escape with minimal margin impacts.
Most of the labor force doesn't cross the 30+ hour threshold, and most full-time managers already receive benefits."Overall, we still favor DRI. While OG comps have underperformed, the well-above industry AUVs highlight its unique quality and position of strength. We believe EPS growth will accelerate nicely in F13 with upside levers if initiatives work as planned," said Bittner, who has an "outperform" rating on Darden Restaurants shares.
Orlando, Florida based Darden Restaurants owns and operates more than 1,900 restaurants that generate over $7.5 billion in annual sales. The company's restaurant brands include Red Lobster, Olive Garden, LongHorn Steakhouse, Seasons 52 and Eddie V's.