What Led to Darden’s EBIT Margin Expansion in Fiscal 2Q17?

In fiscal 2Q17, Darden Restaurants (DRI) reported an EBIT (earnings before interest and tax) margin of 7.1% compared to 7.0% in fiscal 2Q16. The margin was slightly lower than analysts’ estimate of 7.2%.

Sales leverage from positive same-store sales growth, favorable commodity prices, and lower G&A (general and administrative) expenses drove Darden’s margins in fiscal 2Q17.

Compared to fiscal 2Q16, the cost of sales as a percentage of total revenue fell from 29.4% of total sales to 29.1%. G&A expenses and depreciation and amortization expenses fell 1.4% and 0.50%, respectively. 

However, during the same period, labor expenses and other restaurant expenses rose 0.90% and 1.7%, respectively, to offset some of the expansion in Darden’s margins. The rise in labor wages drove labor expenses, while the rise in rent drove other restaurant expenses.

During the same period, Darden’s peers Texas Roadhouse (TXRH), Brinker International (EAT), and Bloomin’ Brands (BLMN) posted EBIT margins of 8.2%, 6.3%, and 3.8%, respectively. In the corresponding quarter of the previous year, they posted EBIT margins of 7.0%, 7.6%, and 4.0%, respectively.

For next four quarters, analysts are expecting Darden’s EBIT margin to expand from 9.2% in the corresponding quarters of the previous year to 10.1%. Sales leverage from positive same-store sales growth and lower G&A expenses are expected to expand Darden’s margins in the next four quarters.

Next, we’ll look at Darden’s earnings for fiscal 2Q17.