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DRI’s EBIT Margins Grow on Sales Leverage and Lower Commodity Prices

Ralph Nathan

What’s Cookin’ for Darden Restaurants: 3Q16 Earnings and Outlook

(Continued from Prior Part)

EBIT margin

In 3Q16, Darden Restaurants (DRI) reported EBIT (earnings before interest and tax) margins of 12.2% compared with 10% in 3Q15, which beat analyst estimates of 10.9%.

The EBIT margins expanded in 3Q16 mainly due to sales leverage and a decline in commodity prices. The overall same-store sales growth of 6.2% led to sales leverage, which increased the company’s revenue without incurring additional capital expenditure. Lower seafood, beef, and natural gas prices combined with the cost reduction initiatives undertaken by the company have hiked Darden’s 3Q16 margins.

Cost and expenses

As a percentage of total sales, food and beverage costs and marketing expenses fell by 1.6% and 0.22%, respectively, in 3Q16 compared to 3Q15. However, some of the improvement in margins were offset by a marginal increase in labor, rent, and administrative expenses.

Peer comparisons

During the same period, Darden’s peers such as Texas Roadhouse (TXRH), Bloomin’ Brands (BLMN), and Brinker International (EAT) are expected to post EBIT margins of 10.9%, 8.1%, and 11%, respectively, compared to 10.6%, 8.2%, and 12.1% in the corresponding quarter of the previous year.

Outlook

Driven by same-store sales growth in the range of 1% to 3% and the cost reduction initiatives, Darden expects to expand its EBIT margins by 0.1% to 0.4% in 2017. Analysts are expecting the EBIT margins of Darden, which forms 0.14% of the iShares Russell Mid-Cap ETF (IWR), to expand from 9.5% in 2016 to 9.8% in 2017.

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