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Darden Restaurants Inc. reports preliminary financial results for the quarter ended 2012-08-31.

Darden Restaurants Inc. (DRI) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Darden Restaurants Inc.’s analysis versus peers uses the following peer-set: Whitbread PLC (WTB), Dunkin’ Brands Group Inc. (DNKN), McDonald’s Holdings Co. (Japan) Ltd. (2702-JP), Arcos Dorados Holdings Inc. Cl A (ARCO), Brinker International Inc. (EAT), Cheesecake Factory Inc. (CAKE), Zensho Holdings Co. Ltd. (7550-JP), Jubilant FoodWorks Ltd. (533155-IN), Buffalo Wild Wings Inc. (BWLD) and BJ’s Restaurants Inc.(BJRI). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-08-31 2012-05-31 2012-02-29 2011-11-30 2011-08-31
Revenues 2,034.8 2,065.5 2,159.7 1,831.5 1,942.0
Revenue Growth % (1.5) (4.4) 17.9 (5.7) (2.4)
Net Income 111.0 151.5 164.1 54.1 106.8
Net Income Growth % (26.7) (7.7) 203.3 (49.3) (22.6)
Net Margin % 5.5 7.3 7.6 3.0 5.5
ROE % (Annualized) 24.0 33.5 37.6 12.0 22.3
ROA % (Annualized) 7.4 10.2 11.1 3.8 7.7

Valuation Drivers

Darden Restaurants Inc.’s current Price/Book of 4.0 is about median in its peer group. We classify DRI-US as Harvesting because of the market’s low expectations of growth (PE of 15.6 compared to peer median of 28.6) despite its relatively high returns (ROE of 25.5% compared to the peer median ROE of 17.1%).
The company’s asset efficiency (asset turns of 1.4x) and net profit margins of 5.9% are both median for its peer group. DRI-US’s net margin continues to trend downward and is now similar to its four-year average net margin of 5.8%.

Economic Moat

Changes in the company’s annual top line and earnings (6.6% and -0.5% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.

DRI-US’s current return on assets is around peer median (8.3% vs. peer median 8.3%). This contrasts with its higher than peer median return on assets over the past five years (8.4% vs. peer median 6.0%), suggesting that the company’s relative operating performance has declined.

The company’s comparatively low gross margins of 23.4% versus peer median of 42.6% suggests that it has a non-differentiated strategy or is in a pricing constrained position. However, DRI-US’s pre-tax margin of 7.9% is around the peer median which, when combined with the gross margin, suggests lower operating costs relative to peers.

Growth & Investment Strategy

DRI-US’s revenues have grown more slowly than the peer median over the last few years (3.5% vs. 9.1% respectively for the past three years) and the stock price’s relatively low PE ratio of 15.6 implies relatively low future growth as well. Overall, we view the company’s growth expectations as substandard relative to its peers.

DRI-US’s annualized rate of change in capital of 4.8% over the past three years is around its peer median of 4.8%. This median investment has likewise generated a peer median return on capital of 12.5% averaged over the same three years. This median return on investment implies that the company is investing appropriately.

Earnings Quality

DRI-US’s net income margin for the last twelve months is around the peer median (5.9% vs. peer median of 5.5%). This average margin combined with a level of accruals that is around peer median (5.1% vs. peer median of 5.1%) suggests there possibly isn’t too much accrual movement flowing into the company’s reported earnings.

DRI-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Graph of Revenues Trend for Darden Restaurants Inc. (DRI))
Graph of Revenues Trend for Darden Restaurants Inc. (DRI))
Graph of Net Margin Trend for Darden Restaurants Inc. (DRI)
Graph of Net Margin Trend for Darden Restaurants Inc. (DRI)
Graph of Accruals Trend (% revenues, Quarterly) for Darden Restaurants Inc. (DRI))
Graph of Accruals Trend (% revenues, Annual or TTM) for Darden Restaurants Inc. (DRI)