It has been about a month since the last earnings report for Darden Restaurants, Inc. DRI. Shares have added about 6% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is DRI due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Darden’s Q3 Earnings Top Estimates, Lifts EPS Guidance
Darden Restaurants reported mixed third-quarter fiscal 2018 results, wherein earnings surpassed the Zacks Consensus Estimate while revenues lagged the same.
Adjusted earnings of $1.71 per share beat the consensus estimate of $1.64 by 4.3%. Earnings increased 29.5% year over year on the back of higher revenues. Notably, the quarter marked the 14th consecutive earnings beat for the company. Darden’s impressive earnings also resulted from the company’s relentless efforts in improving the basic operating factors of the business — food, service and atmosphere.
Total revenues of $2.13 billion slightly lagged the consensus mark of $2.15 billion. Revenues, however, increased 13.3% from the prior-year quarter. The upside was driven by 11.3% growth from the addition of 154 Cheddar's Scratch Kitchen and 34 other new restaurants.
Revenues by Segments
Darden reports its business under four segments: Olive Garden, LongHorn Steakhouse, Fine Dining, which includes The Capital Grille and Eddie V's, and Other Business.
In the reported quarter, the company’s legacy brands posted blended comps growth of 2%. In the previous quarter, comps had increased 3.1%. Meanwhile, the company witnessed increased sales across all its segments in the fiscal third quarter.
Sales at Olive Garden were up 3.7% year over year to $1.07 billion. Comps grew 2.2% at the segment, slightly lower than the prior-quarter’s comps growth of 3%. Traffic rose 0.1%, along with 1.7% improvement in pricing and 0.4% growth in menu mix.
Sales at Fine Dining increased 7% to $164.4 million. Comps at The Capital Grille rose 2.8%, lower than the prior-quarter’s comps growth of 3.8%. Eddie V's also posted comps growth of 2.7%, significantly lower than 6.8% improvement recorded in the preceding quarter.
Revenues from Other Business jumped 71.4% year over year to $438 million. However, comps at Seasons 52 fell 0.2% in the quarter, compared with the prior-quarter’s comps decline of 0.5%. Comps at Yard House inched up 1.9% in the quarter compared with 2% increase in the last quarter. Meanwhile, comps grew 0.2% at Bahama Breeze, lower than comps growth of 2.5% in the preceding quarter.
At LongHorn Steakhouse, sales rose 4.3% to $452.8 million. Comps at LongHorn Steakhouse increased 2%, lower than the prior-quarter’s comps growth of 3.8%. Traffic declined 0.1%, while pricing and menu mix grew 0.7% and 1.4%, respectively.
In the reported quarter, comps at Cheddar's declined 2.2%, comparing unfavorably with the prior-quarter’s decline of 2%.
Operating Highlights & Net Income
Total operating cost and expenses increased 14.9% year over year in the fiscal third quarter to nearly $1.9 billion. This was led by an overall increase in food and beverage costs, restaurant labor and expenses, marketing costs, and general and administrative expenses. As a result, operating margin in the quarter contracted 124 basis points (bps) on a year-over-year basis.
Net earnings in the third quarter were $217.8 million, recording 31.5% growth from the year-ago level.
Balance Sheet
Cash and cash equivalents as of Feb 25, 2018 was $146.8 million, down from $233.1 million as of May 28, 2018.
Inventories totaled $208 million at the end of the reported quarter. Goodwill, as a percentage of total assets, was 44.1% in the quarter.
Long-term debt as of Feb 25, 2018 was $926.4 million, down from $936.6 million as of May 28, 2018.
In the first nine months of fiscal 2018, the company generated cash flow of $751 million from operating activities. It spent about $207.6 million on dividends in the same time period.
During the third quarter, the company repurchased approximately 0.2 million shares of its common stock for a total cost of approximately $19 million. At the end of the quarter, Darden had approximately $262 million remaining under the current $500-million repurchase authorization.
The company’s Board of Directors also declared a regular quarterly cash dividend of 63 cents per share on the company's outstanding common stock. The dividend is payable on May 1, 2018 to shareholders of record, at the close of business on Apr 10, 2018.
Fiscal 2018 EPS Outlook Raised
The company raised its fiscal 2018 adjusted EPS guidance to the range of $4.75-$4.80, up from the previously guided range of $4.70-$4.78. The mid-point of the guided range is higher than the Zacks Consensus Estimate of $4.76 for fiscal 2018.
However, the company maintained its guidance for total sales growth to roughly 13% on expectations of 40 new restaurant openings. Meanwhile, comps are anticipated to grow roughly 2%, as was guided earlier.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.
Darden Restaurants, Inc. Price and Consensus
Darden Restaurants, Inc. Price and Consensus | Darden Restaurants, Inc. Quote
VGM Scores
At this time, DRI has a strong Growth Score of A, though it is lagging a lot on the momentum front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.
Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for value and to a lesser degree momentum.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of this revision indicates a downward shift. Interestingly, DRI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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