We expect Darden Restaurants, Inc. DRI to beat expectations when it reports second-quarter fiscal 2016 results on Dec 18, before the opening bell.
Last quarter, the company posted a positive earnings surprise of 17.24% bringing the trailing four-quarter average to a positive 13.73%.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Darden is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +4.76%. This is a very meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Darden has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 or #5) should never be considered going into an earnings announcement.
The combination of Darden’s Zacks Rank #3 and +4.76% ESP makes us confident of an earnings beat.
Factors to Consider
Darden’s earnings have surpassed the Zacks Consensus Estimate in all the past four quarters. The Florida-based restaurateur performed well in fiscal 2015 as comps at all its restaurant chains gained momentum, after a somewhat disappointing performance in fiscal 2014.
It seems that the efforts to grow and develop the LongHorn Steakhouse by focusing on its core menu, marketing strategy, customer relationship management, digital advertising and a strong promotional pipeline have been yielding positive results.
Also, the Capital Grille and Eddie V's brands, currently reported under the Fine Dining segment; and Yard House, Seasons 52 and Bahama Breeze brands, now part of Other Business segment, have posted positive comps in most of the quarters since the beginning of fiscal 2014. The improvement was supported by innovative culinary offerings and personalized services. The momentum is expected to continue in the second quarter as well.
Moreover, the company’s Olive Garden Brand Renaissance plan – aimed to turn around its business – appears to have started reaping benefits. The plan includes simplifying kitchen systems, developing core menu items, updating the online ordering platform and revamping the restaurant design. The company expects the plan to boost traffic growth, enhance guest experience and support margin expansion.
However, costs related to the implementation of the strategic action plan, renovation of restaurants, technology and other initiatives and higher wage rates will keep profits under pressure in the to-be-reported quarter.
Other Stocks to Consider
Stocks in the restaurants industry that have both a positive Earnings ESP and a favorable Zacks Rank are:
McDonald's Corp. MCD, with an Earnings ESP of +1.64% and a Zacks Rank #1.
Del Taco Restaurants, Inc. TACO, with an Earnings ESP of +5.56% and a Zacks Rank #2.
Panera Bread Company PNRA, with an Earnings ESP of +2.25% and a Zacks Rank #3.
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