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Why Darden Restaurants’ EBIT Margins Fell in Fiscal 1Q18

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Sep. 29 2017, Updated 9:42 a.m. ET

EBIT margins

In fiscal 1Q18, Darden Restaurants (DRI) posted EBIT (earnings before interest and tax) of $180.9 million, which represents an EBIT margin of 9.3% compared to 9.4% in fiscal 1Q17. Analysts were expecting the company’s EBIT margin to be 9.5%. The fall in EBIT margin was due to an $8.0 million rise in asset sales last year, which was unfavorable by 0.40% in fiscal 1Q18.

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Cost analysis

During the quarter, food and beverage cost was favorable by 0.10% due to the rise of 1.5% in menu prices and cost savings, which more than offset commodity cost inflation. Restaurant labor expenses were unfavorable by 0.40% due to brand mix and wage inflation of around 4.0%. Restaurant expenses remained unchanged despite headwinds of 0.10% from pre-opening expenses. Market expenses fell 0.30% due to the promotional shift at Olive Garden and the brand mix. SG&A (selling, general, and administrative) expenses fell 0.40% due to a sales leverage from positive SSSG (same-store sales growth).

Peer comparisons

During the same period, Texas Roadhouse (TXRH), Brinker International (EAT), and Bloomin’ Brands (BLMN) posted EBIT margins of 9.6%, 5.8%, and 4.5%, respectively.

Outlook

For the next four quarters, analysts are expecting Darden’s EBIT margins to expand 0.30%, from 9.9% to 10.2%. Analysts are expecting the rise in menu prices and sales leverage from positive SSSG to offset the effects of the rise in labor expenses and commodity inflation to improve Darden’s EBIT margins in the next four quarters.

Next, we’ll look at Darden’s fiscal 1Q18 EPS (earnings per share).

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