Darden Restaurants Inc. (DRI - Analyst Report) posted better-than-expected fourth quarter and fiscal 2015 results with earnings and revenues beating the Zacks Consensus Estimate. Also, earnings beat management’s expectations for both the periods. The company also provided strong earnings guidance for fiscal 2016 and announced a strategic real estate plan that would help curtail its debt.

Fourth Quarter Earnings and Revenue Discussion

Including the 53rd week of operations, adjusted earnings per share in the fourth quarter came in at $1.08 per share, beating the Zacks Consensus Estimate of 93 cents by 16.1% and increasing 100% year over year. Excluding the 53rd week of operations adjusted earnings per share in the fourth quarter were $1.01 per share, ahead of the consensus mark by 8.6% and up 87% year over year.

The upside in earnings reflects higher revenues, positive comps and lower interest expenses.

Adjusted earnings exclude impairment losses on certain sale leaseback properties, severance and other costs associated with support reduction efforts and strategic action costs associated with the evaluation of real estate portfolio.

Darden Restaurants Inc. - Earnings Surprise | FindTheBest

Total revenue of $1.88 billion beat the Zacks Consensus Estimate of $1.87 billion by 0.3% and also increased 13.8% year over year attributable to revenues from new restaurants and comps growth at all its segments.

Behind the Headline Numbers

Beginning fiscal fourth quarter 2015, Darden has begun reporting through four new segments: Olive Garden, LongHorn Steakhouse, Fine Dining, which includes The Capital Grille and Eddie V's, and Other Business.  The Other Business segment includes Yard House, Seasons 52, Bahama Breeze, consumer packaged goods, and franchise revenues.

The company posted comps growth of 3.8% for fiscal fourth quarter 2015 that compared favorably with comps growth of 3.6% in the preceding quarter. The company agrees that a lot of work is still left to be done and also sees opportunity to further strengthen performance in fiscal 2016.

At LongHorn Steakhouse, sales were up 17% to $438.1 million on revenues from new restaurants and positive comps. Comps at LongHorn Steakhouse increased 5.2%, lower than the prior quarter comps growth of 5.4%.

Sales at Olive Garden were up 12% year over year to $1.04 billion in the quarter due to an improvement in comps and revenues generated from new restaurants. Comps at Olive Garden were up 1.3%, comparing unfavorably with prior quarter comps growth of 2.2%.

However, this marked the third consecutive quarter of comps growth for the brand since the fourth quarter of 2013.It seems that the company’s efforts to grow and develop its chains are yielding positive results. In order to revive traffic growth and support margin expansion, the company is working on its Olive Garden Brand Renaissance plan that has helped in improving comps. The plan includes simplifying kitchen systems, developing new core menu items and revamping its restaurant design.

Sales at Fine Dining increased 15% to $137.2 million, with comps growth of 4.4% and 5.2% at The Capital Grille and Eddie V's, respectively. Meanwhile, comps growth at The Capital Grille and Eddie V's compared unfavorably to comps growth in the prior quarter.

Revenues from Other Business increased 16% year over year to $265.6 million. Comps grew 3.2%, 3.1% and 1.7% at Yard House, Seasons 52 and Bahama Breeze, respectively. Comps at all these units also compared unfavorably with the prior quarter comps growth.

Fiscal 2015 Results

Excluding the 53rd week of operations adjusted earnings per share in fiscal 2015 were $2.56 per share. Its fiscal earnings beat the Zacks Consensus Estimate of $2.50 by 2.4% and increased 50% year over year. Including the 53rd week of operations, adjusted earnings per share were$2.63 per share, ahead of the consensus mark by 5.2% and up 54% year over year.

Total revenue of $6.76 billion increased 8% year over year and marginally beat the consensus mark.

Fiscal 2016 Earnings Guidance Strong

Earnings per share in fiscal 2016 are expected in the range of $3.05 to $3.20, up 20% to 25% year over year. The Zacks Consensus Estimate is currently pegged at $2.85 per share.

The company expects comps growth in the range of 2% to 2.5% in 2016.

Strategic Real Estate Plan to Pay Debt

Darden Restaurants announced that its board of directors has approved a strategic real estate plan to pursue a separation of a portion of the company's real estate assets. The separation would take place through a combination of selected sale leaseback transactions and the transfer of a portion of its remaining real estate assets to a new real estate investment trust (REIT).

The separation would take place through a spin-off, split-off or similar transaction, resulting in the REIT becoming an independent publicly-traded company. Under the plan, Darden will transfer approximately 430 of its owned restaurant properties to the REIT, with substantially all of the REIT's initial assets being leased back to Darden.

Of late, the company has been marketing selected properties for individual sale leasebacks.  To date, the company has listed 75 properties and more than 30 of these have been sold or are under contract. The company expects to close most of these transactions by the end of August. Also, the company is planning to sell and lease back its Orlando Restaurant Support Center property and buildings under a long-term contract with multiple renewal options at its discretion.

The company intends to use the proceeds generated from the strategic real estate plan to retire its debt of approximately $1.0 billion over time.

Darden presently has a Zacks #3 (Hold).

Stocks to Consider

Better-ranked stocksin the restaurant industry include Dave & Buster's Entertainment, Inc. (PLAY - Snapshot Report), Zoe's Kitchen, Inc. (ZOES - Snapshot Report) and BJ's Restaurants, Inc. (BJRI - Analyst Report). While Dave & Buster's Entertainment and Zoe's Kitchen sport a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy).

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