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Will Darden Restaurants (DRI) Disappoint This Earnings Season?

DRI LO BAGR FRGI

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Darden Restaurants, Inc. (DRI - Analyst Report) is set to report second-quarter fiscal 2014 results on Dec 19, before the market opens. Last quarter, it posted a negative earnings surprise of 23.19%. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Darden has been reeling under pressure for quite some time now due to weak performance in two of its core brands — Red Lobster and Olive Garden. Although the company has undertaken a set of initiatives such as value-proposition and promotional offers to boost the brands, these are yet to pay off.

Implementation of Darden’s cost saving initiatives will include $10 million upfront costs in the second quarter while only $3 million savings will be realized thus putting pressure on the bottom line. Moreover, Darden expects shrimp, crab, beef, poultry and dairy prices will be higher in the first half of 2014. Higher food costs along with increased expenses on promotions and discounting pricing strategy will keep margins under pressure at the current level.

The company expects the business environment to remain sluggish in fiscal 2014. According to the company, consumers have become extremely value-sensitive and economic recovery will be slow.

Earnings Whisper?

Our proven model does not conclusively show that Darden is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Negative Zacks ESP: The Earnings ESP is -19.05%. That is because the Most Accurate estimate stands at 17 cents while the Zacks Consensus Estimate is higher at 21 cents. That is a difference of -19.05%.

Zacks Rank: Darden carries a Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks #3 Rank when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies you may consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Diversified Restaurant Holdings, Inc. (BAGR - Snapshot Report), with Earnings ESP of +100.0% and a Zacks Rank #3 (Hold).

Fiesta Restaurant Group, Inc. (FRGI - Snapshot Report), with Earnings ESP of +17.65% and a Zacks Rank #3 (Hold).

Lorillard, Inc. (LO - Analyst Report), with Earnings ESP of +1.18% and a Zacks Rank #3 (Hold).

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