Darden Restaurants (DRI) Down 8.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Darden Restaurants (DRI). Shares have lost about 8.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Darden Restaurants due for a breakout? 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 Earnings Surpass Estimates in Q1, Sales Miss

Darden Restaurants reported first-quarter fiscal 2020 results, wherein earnings surpassed the Zacks Consensus Estimate but sales lagged the same. With this, the company delivered third-straight quarter of bottom-line beat, whereas the top line missed the consensus mark for the second straight quarter.

In the quarter under review, adjusted earnings came in at $1.38 per share, which outpaced the Zacks Consensus Estimate of $1.36. The bottom line also increased 3% year over year on higher sales. Results were aided by the company’s relentless efforts to improve the basic operating factors of the business — food, service and ambiance.

Total sales of $2,133.9 million lagged the consensus mark of $2,137 million. However, sales increased 3.5% from the prior-year quarter. The upside was driven by the addition of 40 net restaurants and a 0.9% 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 3.6% year over year to $1,090.2 million. Comps grew 2.2% at the segment, lower than the prior-quarter’s comp growth of 2.4%. Traffic declined 0.8%. Pricing improved 2.2% and menu-mix increased 0.8%.

Sales at Fine Dining improved 4.8% to $136.1 million. Comps at The Capital Grille rose 1.5% compared with 2.9% growth recorded in fourth-quarter fiscal 2019. Further, Eddie V's posted comps growth of 1.2%, lower than 2% improvement recorded in the prior quarter.

Sales at Other Business grew 1.8% year over year to $457.4 million. However, comps at Seasons 52 fell 4.2% in the reported quarter compared with a comps decline of 1.5% in fourth-quarter fiscal 2019. Comps at Yard House inched down 1.9% compared with 1.4% decrease in the prior quarter. Meanwhile, comps slipped 4.2% at Bahama Breeze compared with a decline of 1.9% in the preceding quarter.

At LongHorn Steakhouse, sales rose 4.6% to $450.2 million. Comps at the segment increased 2.6%, down from comps growth of 3.3% in the fiscal fourth quarter. Traffic increased 0.3%. Also, pricing and menu mix grew 1.7% and 0.6%, respectively.

In the reported quarter, comps at Cheddar's decreased 5.4% compared with a 3.4% decline in fourth-quarter fiscal 2019.

Operating Highlights & Net Income

In the fiscal first quarter, total operating costs and expenses increased 3.2% year over year to $1,932.4 million. The rise was due to an overall increase in food and beverage costs, restaurant expenses, and labor costs.

Net earnings in the first quarter totaled $170.6 million, up 2.6% from the year-ago level.

Balance Sheet

Cash and cash equivalents as of Aug 25, 2019, totaled $350.8 million, up from $457.3 million as of May 23, 2019.

Inventories summed $199 million at the end of the reported quarter. Long-term debt as of Aug 25, 2019, was $928 million, up from $927.7 million as of May 26, 2019.

During the fiscal first quarter, Darden repurchased approximately 0.8 million shares of its common stock for roughly $95 million. The company also authorized a fresh share repurchase program of $500 million.

Fiscal 2020 Outlook

Darden reiterated its 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?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

Currently, Darden Restaurants has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. 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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