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How Will Darden Restaurants' (DRI) Top Line Shape Up in Q2?

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Darden Restaurants, Inc. (DRI - Free Report) is set to report second-quarter fiscal 2018 results on Dec 19, before market opens.

Shares of Darden have rallied 19.8% so far this year when compared with the industry’s gain of 13.1%.

Let’s see how the company’s brands are integrating to give shape to its top line.

Revenue Scenario   

Darden started off fiscal 2018 on a solid note. The company’s initiatives to boost the top line have been reflected in first-quarter results. The company recorded $1.9 billion in total sales from continuing operations. The figure marked 12.9% year-over-year growth.

Despite recent hurricanes hitting the U.S. restaurant space, Darden has somewhat managed to record substantial revenue growth across its brands in the first quarter. Overall sales for company are expected to rise in the to-be-reported quarter on the back of several initiatives. In fact, The Zacks Consensus Estimate for current-quarter net sales is pegged at $1.9 billion, reflecting 12.6% year-over-year growth.

Segment Revenues

Olive Garden, being the most promising of all brands and accounting for 51.1% of total revenues, witnessed the 12th consecutive quarter of positive comps in first-quarter fiscal 2018. Net sales in the quarter grew 3% on a year-over-year basis while comps rose 1.9%.

In order to boost the Olive Garden brand, the company adopted a set of initiatives under its Brand Renaissance Plan. These included simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, developing new core menu items, allowing customization and making smarter promotional investments. Also, the brand is planning on remodeling bar refreshes. Additionally, Olive Garden’s To Go business, which offers online ordering at selected locations, is growing at a rapid pace (increasing 12% year over year in the first quarter). The brand has also launched catering services in the United States, which is expected to add to the top line.

The consensus estimate for current-quarter net sales at the segment is pegged at $933 million, reflecting 2% year-over-year growth. However, the segment revenues will likely decline 5.8% sequentially. Comps are expected to increase 0.2% in the to-be-reported quarter.

At LongHorn (accounting for 20.9% of the company’s net sales) the company is focusing on core menu, culinary innovation and providing regional flavors. It is also working on marketing strategy to improve execution, customer relationship management and digital advertising. Further, the company continues to focus on strengthening its in-restaurant execution through strategic investments in quality and simplification of operations in order to enhance guest experience. Owing to these efforts, segment comps have grown over the last 18 quarters. In the last reported quarter, comps at the segment grew 2.6%, beating the industry mark, excluding Darden, by 560 points. The consensus estimate for current-quarter comps growth is at 0.2%.

Meanwhile, net sales in the last reported quarter increased nearly 4.7%. The consensus estimate for net sales in the to-be-reported quarter is pegged at $375 million, reflecting a 2.7% year-over-year growth. However, on a sequential basis the segment’s sale are likely to decline 7.2%.

Sales at Fine Dining, accounting for 6.3% of total revenues, increased 7% to $122.2 million in the first quarter. Comps at The Capital Grille rose 2%, higher than the prior-quarter comps growth of 0.5%. Meanwhile, Eddie V's posted comps growth of 2.5%, lower than 3.3% recorded in the preceding quarter. The consensus estimate for comps growth in the second quarter is at 0.1% for Capital Grille and 0.2% for Eddie.

Revenues at Other Business (21.7% of net sales) rose 66% year over year to $419.5 million in the first quarter on the addition of Cheddar’s in April 2017. Darden is currently integrating Cheddar’s and is making significant non-guest-facing changes that would improve the brand’s performance over time. Comps in the first quarter surpassed industry benchmarks, excluding Darden, but declined 1.4%. Cheddar’s has an extensive presence in Texas which exposed it more to the effects of Hurricane Harvey than Darden. However, the company expects Cheddar’s to perform well in the quarters ahead.


Zacks Rank & Stocks to Consider

Darden carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same space are Famous Dave's of America, Inc. , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Good Times Restaurants, Inc. .

Dave's of America sports a Zacks Rank #1 (Strong Buy). The company’s long-term earnings growth rate is projected at 20%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arcos Dorados and Good Times carry a Zacks Rank #2 (Buy). Long-term earnings per share growth rate for Arcos Dorados and Good Times are projected at a respective 11.9% and 25%.

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