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Will Darden (DRI) Disappoint this Earnings Season?

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Leading restaurateur, Darden Restaurants, Inc. (DRI - Free Report) is set to report fiscal fourth quarter and 2014 results on Jun 20, 2014. Last quarter, the company posted in-line results. Let’s see how things are shaping up for this announcement.
Factors to Consider

Underperformance of Darden’s core brands, Red Lobster and Olive Garden has been a headwind for the company for quite some time. The company has divested its Red Lobster segment under its comprehensive strategy to enhance shareholders value. The divestiture will also help it to focus on its more profitable brands like LongHorn Steakhouse and Capital Grille.

Morever, in order to make the business more profitable, the company is working on its comprehensive strategic plan. However, the costs associated with the strategic action plan are hurting its bottom line.

One other major concern for the company is commodity inflation due to higher shrimp and beef costs. Higher shrimp prices due to production issues in Asia and higher seafood, beef, poultry and dairy costs are expected to hurt fourth quarter and full year results.
Taking into account these factors, the company expects earnings for fiscal 2014 to decline in the range of 15.0% to 20.0%. However, the current rate of decline excludes the costs that the company is expected to incur related to the strategic review plan in fiscal 2014. These costs would therefore further curtail profits in fiscal 2014 as well as fiscal 2015.

Earnings Whispers?

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 of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: Darden Restaurants’ ESP is -1.08% since the Most Accurate Estimate stands at 92 cents per share, while the Zacks Consensus Estimate is higher at 93 cents.

Zacks Rank #4 (Sell): Darden’s Zacks Rank #4 when combined with a negative ESP makes surprise prediction difficult. We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Darden witnessed downward movement of estimates in the past 30 and 60 days for fourth quarter as well as fiscal 2014.

Other Stocks to Consider

Other stocks in the restaurants industry and broader retail wholesale sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Red Robin Gourmet Burgers Inc. (RRGB - Free Report) , with Earnings ESP of + 1.11% and Zacks Rank #2 (Buy).

Chipotle Mexican Grill, Inc. (CMG - Free Report) , with Earnings ESP of + 1.31% and Zacks Rank #3 (Hold).

The Kroger Co. (KR - Free Report) , with Earnings ESP of + 1.91% and Zacks Rank #2.


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