Darden Restaurants Inc. DRI posted strong fiscal second quarter 2016 results. While earnings beat the Zacks Consensus Estimate, revenues missed the same. In fact, this quarter marked the fifth consecutive earnings beat for the company. All the brands posted positive comps. The company also increased its earnings and comps guidance for fiscal 2016.
Earnings and Revenue Discussion
Adjusted earnings per share in the second quarter came in at 54 cents per share, beating the Zacks Consensus Estimate of 42 cents by approximately 28.6%. Earnings increased a whopping 92.9% on a year-over-year basis. The upside in earnings reflects higher revenues, positive comps and lower operating expenses.
Adjusted earnings exclude costs related to the real estate plan implementation, debt retirement costs and strategic action plan and other costs.
Total revenue of $1.609 billion lagged the Zacks Consensus Estimate of $1.626 billion by approximately 1%. However, it increased 3.2% year over year. The year-over-year upside reflects revenues from new restaurants and comps growth at all its segments.
Behind the Headline Numbers
Beginning fiscal fourth quarter 2015, Darden began reporting through four new segments: Olive Garden, LongHorn Steakhouse, Fine Dining, which includes The Capital Grille and Eddie V's, and Other Business. The Other Business segment includes Yard House, Seasons 52, Bahama Breeze, consumer packaged goods, and franchise revenues.
The company posted comps growth of 2.9% in fiscal second quarter 2016, on a comparable basis, driven by positive comps at all its brands. However, this compared unfavorably with comps growth of 3.4% in the preceding quarter.
Sales at Olive Garden were up 1.2% year over year to $892.3 million in the quarter due to an improvement in comps and revenues generated from new restaurants. Comps at Olive Garden were up 2.8%, comparing favorably with prior quarter comps growth of 2.7%, driven by 0.9% traffic growth, 1% improvement in pricing and higher menu mix of 0.9%.
Moreover, this marked the fifth consecutive quarter of comps growth for the brand since the fourth quarter of fiscal 2013. It seems that the company’s efforts to grow and develop its chains are yielding positive results. In order to revive traffic growth and support margin expansion, the company is working on its Olive Garden Brand Renaissance plan that has helped in improving comps. The plan includes simplifying kitchen systems, developing new core menu items and revamping its restaurant design.
However, we believe, the company should further strengthenits initiatives to improve traffic as the improvement in comps was due to pricing and not traffic growth.
Sales at Fine Dining increased 2.4% to $123.3 million, with comps growth of 0.9% at The Capital Grille that compared unfavorably with the prior quarter comps growth of 7.2%. Meanwhile, Eddie V's posted comps growth of 3.2%, marginally lower than comps growth of 5.1% in the preceding quarter.
Revenues from Other Business increased 8.1% year over year to $228.1 million. Comps grew 2.4%, 3.8% and 5.8% at Yard House, Seasons 52 and Bahama Breeze, respectively. While comps at Bahama Breeze compared favorably with the prior quarter comps growth, the other two units witnessed unfavorable comparisons with the preceding quarter.
At LongHorn Steakhouse, sales were up 5.6% to $365.1 million driven by positive comps and revenues generated from new restaurants. Comps at LongHorn Steakhouse increased 3.6% driven by 1.5% traffic growth and improvement of 2.3% in pricing, offset by lower menu mix of 0.2%. However, it was lower than the prior quarter comps growth of 4.4%.
Other Financial Update
During the quarter, the company’s board increased its regular quarterly cash dividend by 14% to 50 cents per share. This is higher from the minimum quarterly dividend of 43.75 cents disclosed on Nov 9, 2015. The new dividend will be paid on Feb 1, 2016 to shareholders of record at the close of business on Jan 8, 2016.
In addition, Darden's board has authorized a new share repurchase program under which the company may repurchase up to $500 million of its outstanding common stock. This repurchase program does not have an expiration period and replaces all other outstanding share repurchase authorizations.
Fiscal 2016 Guidance Raised
The company has increased its earnings guidance for fiscal 2016. Earnings per share in fiscal 2016 are expected in the range of $3.25 to $3.35 compared with the previous expected range of $3.15 to $3.30. The updated guidance takes into account an expected reduction of diluted earnings per share of approximately 8 cents related to the recently completed real estate transactions, excluding advisory fees and other one-time expenses. The range is far above the year-ago figure of $2.63 and also higher than the Zacks Consensus Estimate of $3.21.
Also, the company has raised its comps growth expectation in the range of 2.5% to 3.0% for fiscal 2016, compared with the previous range of 2% to 2.5%.
Darden presently has a Zacks Rank #3 (Hold).
Stocks to Consider
Better-ranked stocks in the restaurant industry include BJ’s Restaurants, Inc. BJRI, Carrols Restaurant Group, Inc. TAST and Dave & Buster's Entertainment, Inc. PLAY. All these stocks sport a Zacks Rank #1 (Strong Buy).
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