On Jan 16, we issued an updated research report on Darden Restaurants, Inc. (DRI).
On Dec 16, 2014, Darden Restaurants posted strong second-quarter fiscal 2015 results with earnings and revenues beating the Zacks Consensus Estimate. Also, the company increased the lower end of its fiscal 2015 earnings guidance.
Earnings from continuing operations of 28 cents per share increased significantly year over year owing to improvement in revenues and margins. Also, earnings were at the higher end of the expected range of 26 cents to 28 cents per share. Total revenue of $1.56 billion increased 5% year over year attributable to revenues from 53 net new restaurants and comps growth at all its segments.
We note that comps at the company’s restaurants are improving every quarter. The upside reflects sales initiatives taken by the company. In order to boost the performance of its brands, the company is implementing a set of initiatives under its Brand Renaissance Plan. These include simplifying kitchen systems, developing new core menu items and revamping its restaurant design. The revamped restaurants are already generating high same-restaurant sales and returns. In fact, the remodeling program has gained momentum in the last couple of quarters.
The company is also focusing on technology-driven initiatives like implementation of tablets in its system to capitalize on the digital wave that has hit the U.S. fast casual restaurant sector.
Also, its efforts to curb costs are commendable. Darden Restaurants has laid down an aggressive cost management plan, under which it has been able to significantly reduce operating costs. Also, the company announced several strategic actions to streamline its support functions that will benefit the restaurants and trim overhead costs. These actions are expected to generate approximately $20 million in annualized cost savings as the result of a reduction in general and administrative expenses. We expect these initiatives to continue to aid the company’s profitability, going forward.
Nevertheless, like all other restaurants higher food costs have been denting the margins of the company. Costs related to the implementation of the strategic action plan are expected to further hurt profitability. Despite cost saving initiatives being taken by the company, we expect higher commodity costs and increased expenses on promotions and discounted pricing to continue to keep margins under pressure in fiscal 2015. Also, the wait for improvement in its struggling core brand, Olive Garden keeps us on the sidelines.
Darden Restaurants presently has a Zacks Rank #2 (Buy). Some other stocks that can be considered in the same industry include BJ's Restaurants, Inc. (BJRI), Bob Evans Farms, Inc. (BOBE) and Brinker International, Inc. (EAT). All these stocks carry a Zacks Rank #2.
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