Can Darden Maintain the Momentum with Its Fiscal 3Q16 Earnings?
Sales leverage and lower commodity prices are expected to expand Darden Restaurants’ (DRI) EBIT (earnings before interest and taxes) margins from 10% in fiscal 3Q15 to 10.9% in fiscal 3Q16. EBIT margins are calculated by dividing earnings before interest and tax by total revenue.
Factors affecting EBIT margins
The lower commodity costs, such as beef, dairy products, and seafood in fiscal 3Q16 could reduce food and beverage costs as a percentage of sales in 3Q16 compared to fiscal 3Q15. Analysts are expecting the same-store sales growth of 4.7% to improve Darden’s margins, as positive same-store sales growth leads to sales leverage.
Darden, which forms 0.14% of the iShares Russell Mid-Cap ETF (IWR), has set the guidance for 2016 to save $80 million–$90 million through improved business processes, which could improve EBIT margins. However, the increase in labor and benefits costs due to a hike in minimum wages are expected to offset some of the margin improvements.
During the same period, Darden’s peers 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%, respectively, in the corresponding quarter of the previous year.
For fiscal 2016, analysts are expecting Darden Restaurants’ (DRI) EBIT margins to be at 9.4%, which represents an improvement of 1.8% from 7.6% in fiscal 2015. Improved operating procedures, lower commodity prices, and positive same-store sales growth are expected to improve Darden’s margins in 2016. Going into 2017, analysts are expecting the margins to decline in the first two quarters.
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