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Here's Why Darden (DRI) Stock is Down Despite Q2 Earnings Beat

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Shares of Darden Restaurants, Inc. (DRI - Free Report) have fallen 5.2% following the company’s quarterly results on Dec 18. The decline can be primarily attributed to lower-than-expected second-quarter fiscal 2020 revenues. Further, the top line missed the consensus mark for the third straight quarter. However, the company reported better-than-expected earnings for the fourth straight quarter.

In the quarter under review, adjusted earnings came in at $1.12 per share, which outpaced the Zacks Consensus Estimate of $1.07. The bottom line also improved 21.7% year over year. Earnings were aided by the company’s relentless efforts to augment the basic operating factors of the business — food, service and ambiance.

Total sales of $2,056.4 million lagged the consensus mark of $2,058 million. However, sales improved 4.2% from the prior-year quarter driven by the addition of 37 net restaurants and a 2% increase in blended comps.

Sales by Segments

Darden reports business under four segments — Olive Garden, LongHorn Steakhouse, Fine Dining that includes The Capital Grille and Eddie V's, and Other Business.

Sales at Olive Garden increased 2.6% year over year to $1,023.6 million. Comps grew 1.5% at the segment, lower than the prior-quarter’s comp growth of 2.2%. Traffic declined 1.2%. Pricing improved 2% and menu-mix increased 0.7%.

Sales at Fine Dining improved 5.5% to $154.8 million. Comps at The Capital Grille rose 1.8% compared with 1.5% growth in first-quarter fiscal 2020. Further, Eddie V's reported comps growth of 0.5%, lower than 1.2% improvement in the prior quarter.

Sales at Other Business grew 3.5% year over year to $430.7 million. However, comps at Seasons 52 fell 3.5% in the reported quarter compared with a comps decline of 4.2% in first-quarter fiscal 2020. Comps at Yard House inched up 0.7% compared with 1.9% decrease in the prior quarter. Meanwhile, comps slipped 3.4% at Bahama Breeze compared with a decline of 3.2% in the preceding quarter.

At LongHorn Steakhouse, sales advanced 8.4% to $447.3 million. Comps at the segment increased 6.7%, compared with comps growth of 2.6% in the year-ago quarter. Traffic improved 3.2%. Also, pricing and menu mix grew 1.9% and 1.6%, respectively.

In the reported quarter, comps at Cheddar's decreased 1.2% compared with a 5.4% decline in the prior-year quarter.

Darden Restaurants, Inc. Price, Consensus and EPS Surprise

 

Operating Highlights & Net Income

In the fiscal second quarter, total operating costs and expenses increased 3.9% year over year to $1,896.2 million. The rise can be attributed to an overall increase in food and beverage costs, restaurant expenses, and labor costs.

Balance Sheet

Cash and cash equivalents as of Nov 24, 2019, totaled $157.3 million, down from $457.3 million as of May 26, 2019.

Inventories totaled $212.2 million at the end of the reported quarter. Long-term debt as of Nov 24, 2019, was $928.2 million, up from $927.7 million as of May 26, 2019.

During the fiscal second quarter, Darden repurchased approximately 1.2 million shares of its common stock for roughly $136 million.

Fiscal 2020 Outlook

Darden reiterated fiscal 2020 outlook. The company continues to expect total revenue growth of 5.3-6.3% during the fiscal year. This will include the 2% positive synergy from the 53rd week. Comps are projected to increase 1-2%. Darden’s earnings per share are anticipated to be $6.30-$6.45.

Meanwhile, the company expects inflation to be up 2.5% in 2020. With an effective tax rate of 10-11%, total capital spending is expected to be $450-$500 million. Darden plans to open 50 gross and 44 net new restaurants in 2020.

Zacks Rank & Key Picks

Darden has a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. (CMG - Free Report) , The Habit Restaurants, Inc. and Wingstop Inc. (WING - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipotle Mexican Grill, Habit Restaurants and Wingstop’s have an estimated long-term earnings growth rate of 19.7%, 10% and 15.3%, respectively.  

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