Dining Out Is In Again

10/14/2009 1:00 pm EST

Focus: STOCKS

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

Tobin Smith and Joshua Levine of ChangeWave Investing say their latest survey reveals consumers are more likely to dine out, and they’re trading up to better restaurants, too.

For nearly two years, the restaurant business has suffered as much as any industry. Faced with rising unemployment and a damaged economy, budget-conscious consumers have gone out less and cut back on their dining expenses.

While the overall results [of our latest ChangeWave Alliance survey] show clear signs of improvement for the restaurant industry, things appear to be tightening for the fast food sector as consumers appear to be "trading up" when it comes to dining out.

Finally, we got a bit of good news. After four consecutive monthly surveys of virtually no change, we've seen an up tick in restaurant spending. Eleven percent (11%) of respondents said they would spend more money at restaurants going forward—one [percentage] point better than August. Another 36% said they will be spending less—also a one-point improvement.

Importantly, we saw other positive signs, too. A growing number of consumers spent more than [they] planned eating out, and they ate out a bit more often. While the overall numbers continue to be in negative territory, the key is that the trends are improving.

Looking ahead, 5% of respondents said they will be dining at more expensive restaurants going forward—one point higher than in the May 2009 survey.

Among the four best-positioned chains going forward, two of them, Olive Garden and Red Lobster, are owned by Darden Restaurants (NYSE: DRI). DRI appears likely to bounce back with better results this quarter

Darden [recently] reported its fiscal [first-quarter] (ending in August) results, and it beat consensus by a penny on earnings per share, while revenues fell 2.3% year over year to $1.73 billion versus the $1.78 billion consensus.

DRI also reiterated its fiscal year 2010 guidance, seeing earnings of $2.59-$2.85 per share and revenues of $7.08 billion to $7.29 billion.

In the first quarter, US same-restaurant sales decreased 2.9% at Olive Garden and 7.9% at Red Lobster. These results compare to an estimated decrease of 7.8% in the Knapp-Track benchmark of US same-restaurant sales, excluding Darden.

Darden still is outperforming the industry average, and more importantly is executing without having to resort to aggressive margin-sapping discounts. And as we mentioned earlier, DRI's Olive Garden and Red Lobster rated among the best in the Alliance's recent consumer restaurant survey.

Bottom line: DRI shares took a hit following the release of its earnings, but our intelligence shows DRI's current quarter is going to be better than the Street expects. We recommend you buy aggressively below $33. Our Buy Under is $36. (It closed just below $33 Tuesday—Editor.)

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