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Darden (DRI) Stock Up on Q3 Earnings Beat & Upbeat View

Zacks Equity Research

Darden Restaurants, Inc. DRI reported third-quarter fiscal 2019 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate. Following the quarterly results, shares of Darden increased 4% in pre-market trading.

Adjusted earnings of $1.80 per share beat the Zacks Consensus Estimate of $1.75. Moreover, the bottom line increased 5.3% year over year on the back of higher revenues. Results were aided by the company’s relentless efforts to improve the basic operating factors of the business — food, service and ambiance.

Total revenues of $2,246.5 million surpassed the consensus mark of $2,238 million. Moreover, revenues increased 5.5% from the prior-year quarter. The upside was driven by sales growth across most of the brands.

Darden Restaurants, Inc. Price, Consensus and EPS Surprise

Darden Restaurants, Inc. Price, Consensus and EPS Surprise | Darden Restaurants, Inc. Quote

Revenues by Segments

Darden reports business under four segments — Olive Garden, LongHorn Steakhouse, Fine Dining that includes The Capital Grille and Eddie V's, and Other Business.

In the fiscal third quarter, the company’s legacy brands posted blended comps growth of 2.8%. In the fiscal second quarter, comps had increased 2.1%.

Sales at Olive Garden were up 5.3% year over year to $1,130.2 million. Comps grew 4.3% at the segment, higher than the prior quarter’s comp growth of 3.5%. Traffic inched up 0.1%. Pricing improved 1.8% and menu-mix increased 2.4%.

Sales at Fine Dining increased 6.1% to $174.5 million. Comps at The Capital Grille rose 4.3% compared with 3.7% in second-quarter fiscal 2019. Eddie V's also posted comps growth of 3.7%, higher than 0.9% improvement recorded in the last reported quarter.

Revenues from Other Business jumped 4.7% year over year to $458.6 million. However, comps at Seasons 52 fell 1.3% in the reported quarter against comps decline of 0.8% in second-quarter fiscal 2019. Comps at Yard House edged down 2.1% compared with 1.1% decrease in the last reported quarter. Meanwhile, comps slipped 3.7% at Bahama Breeze, compared with a decline of 1.1% in the preceding quarter.

At LongHorn Steakhouse, sales rose 6.7% to $483.2 million. Comps at LongHorn Steakhouse increased 3.8%, up from comps growth of 2.9% in the fiscal second quarter. Traffic decreased 0.5% while pricing and menu mix grew 1.8%, and 1.5%, respectively.

In the reported quarter, comps at Cheddar's decreased 2.7% compared with 4% decline in second-quarter fiscal 2019.

Operating Highlights & Net Income

In the fiscal third quarter, total operating costs and expenses increased 4.5% year over year to $1,981 million. The rise was due to an overall increase in food and beverage costs, restaurant expenses and labor costs.

Net earnings in the fiscal third quarter were $223.6 million, up 0.3% from the year-ago level.

Balance Sheet

Cash and cash equivalents as of Feb 24, 2019, totaled $302.9 million, up from $146.9 million as of May 27, 2018.

Inventories totaled $209.5 million at the end of the reported quarter. Goodwill, as a percentage of total assets, was 20.8% in the quarter.

Long-term debt as of Feb 24, 2019 was $927.4 million, up from $926.5 million as of May 27, 2018.

During the fiscal third quarter, the company repurchased approximately 0.7 million shares of its common stock for roughly $74 million. The company still has $346 million remaining under the current $500-million repurchase authorization.

Fiscal 2019 Outlook

For fiscal 2019, the company now expects total revenues to increase 5.5%, compared with the prior estimate of 5-5.5%. Comps are projected to increase 2.5%-2.7% compared with 2.5% guided previously. Darden’s earnings per share are anticipated to be $5.76-$5.80, up from $5.60-$5.70 guided earlier.

Zacks Rank & Other Stocks to Consider

Darden Restaurants has a Zacks Rank #2 (Buy). Other top-ranked stocks in the same space include Brinker International, Inc. EAT, Starbucks Corporation SBUX and Yum China Holdings, Inc. YUMC, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Brinker International has an impressive long-term earnings growth rate of 14.5%.

Starbucks delivered positive earnings surprise in three out of the trailing four quarters, with the average beat being 6%.

Yum China Holdings reported better-than-expected earnings in all the trailing four quarters, with the average beat being 26.2%.

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