Why Did Darden Restaurants’ Earnings Margin Rise in Fiscal 4Q16?
In fiscal 4Q16, Darden Restaurants (DRI) reported an EBIT (earnings before interest and tax) margin of 10.3% compared with 10.1% in fiscal 4Q15. However, its 4Q16 EBIT margin was lower than analysts’ estimate of 10.6%.
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The company’s EBIT margin expanded in fiscal 4Q16 mainly due to a drop in commodity prices. Sales leverage due to positive sales growth also contributed to the growth of the company’s EBIT margin.
Costs and expenses
As a percentage of total sales, Darden’s food and beverage costs, G&A (general and administrative expenses, and depreciation and amortization expenses were lower than in fiscal 4Q15. Favorable commodity prices, which are estimated to have fallen 1%, helped the company to reduce its food and beverage costs. Although labor wages increased, the company managed to keep expenses as a percentage of total sales constant by improving its processes and procedures, thus requiring less manpower. However, the increase in restaurant expenses, such as rent, offset some of the gains in margins.
For the same period, Darden’s peers Texas Roadhouse (TXRH), Bloomin’ Brands (BLMN), and Brinker International (EAT) are expected to post EBIT margins of 9.1%, 5.5%, and 12.2%, respectively, compared to 7%, 5.6%, and 12.1%, respectively, in the corresponding quarter of the previous year.
Driven by same-store sales growth in the range of 1%–2% and cost reduction initiatives, Darden expects to expand its EBIT margin by 0.1%–0.4% in fiscal 2017. Analysts are expecting the EBIT margin of Darden, which forms 0.14% of the iShares Russell Mid-Cap ETF (IWR), to expand from 9.5% in fiscal 2016 to 10% in fiscal 2017.
In the next part of this series, we’ll see how Darden’s results have influenced analysts’ estimates for the company.