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What Led to Darden’s Earnings Margin Expansion in Fiscal 3Q17?

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Apr. 3 2017, Updated 9:07 a.m. ET

EBIT margin

In fiscal 3Q17, Darden Restaurants (DRI) reported an EBIT (earnings before interest and tax) margin of 12.2%, compared to 9.8% in fiscal 3Q16. The margin was slightly higher than analysts’ estimate of 12.1%.

Darden’s fiscal 3Q17 EBIT margin expanded due to sales leverage from favorable commodity prices, its positive same-store sales growth, and its lower SG&A (selling, general, and administrative) expenses.

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Fall in expenses

The company’s food and beverage expenses fell from 29.1% of its revenue in fiscal 3Q16 to 28.8% of its revenue in fiscal 3Q17. A 0.8% deflation in commodity prices and cost-saving initiatives lowered food and beverage expenses for the company in the quarter. Its labor expenses fell 0.2% from 31% in fiscal 3Q16 due to lower incentives. Its SG&A expenses also fell from 5.2% to 4.6% due to lower management incentives.

However, during the quarter, its restaurant operating expenses rose 0.6% to 17.1% due to public liability claims, a rise in natural gas prices, a rise in restaurant preopening expenses, a rise in credit card fees. A rise in restaurant operating expenses and a 0.2% rise in marketing expenses offset some of the expansion in Darden’s EBIT margin.

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Peer comparison

During the same period, peers Texas Roadhouse (TXRH), Brinker International (EAT), and Bloomin’ Brands (BLMN) posted EBIT margins of 6.4%, 8.1%, and 5.7%, respectively. In the corresponding quarters of the previous year, these companies posted EBIT margins of 7.4%, 9.7%, and 6.0%, respectively.

Outlook

In the next four quarters, analysts are expecting Darden to post an EBIT margin of 10.2%, compared to its margin of 9.9% in the corresponding quarters of the previous year. 

Darden’s management expects a slight rise in commodity prices in fiscal 4Q17. The company also expects the rise in labor wages to negatively impact its margins in the quarter.

Next, let’s look at Darden’s fiscal 3Q17 earnings per share.

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