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Why Is Darden Restaurants (DRI) Up 4.1% Since Last Earnings Report?

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A month has gone by since the last earnings report for Darden Restaurants (DRI - Free Report) . Shares have added about 4.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Darden Restaurants due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Darden Q2 Earnings Beat, Sales Lag Estimates

In second-quarter fiscal 2020, 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.

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.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

Currently, Darden Restaurants has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Darden Restaurants has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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