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Why Darden’s Earnings Margin Declined in Fiscal 3Q18

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Fiscal 3Q18 performance

In fiscal 3Q18, Darden Restaurants (DRI) posted EBIT (earnings before interest and tax) of $240.1 million, which represents an EBIT margin of 11.3%. The company’s EBIT margin had been 12.2% in fiscal 3Q17. The decline was due to increased labor costs, G&A (general and administrative) expenses, and D&A (depreciation and administration) expenses.

Labor expenses increased from 30.8% of the total revenue in fiscal 3Q17 to 32.1% due to wage inflation of approximately 4.0%, some of which was offset by an increase in menu prices and productivity improvements. Also, the mark-to-market expenses for general managers and the managing partner, and the $20 million investment in its workforce, increased the company’s labor expenses.

G&A expenses increased from 4.6% to 5.2% due to increased deferred compensation related to significant increase in the equity markets and other equity-based programs. D&A expenses increased from 3.6% to 3.7%.

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However, some of the increase in expenses was offset by lower food and beverage costs, restaurant expenses, and marketing expenses. Food and beverage costs declined from 28.8% in fiscal 3Q17 to 28.3% in 3Q18. The rise in menu prices, cost savings, and synergies more than offset 1.0% of commodity inflation to lower food and beverage costs. Restaurant expenses and marketing expenses declined 0.1% each during the quarter.

Peer comparisons

During the period, Texas Roadhouse (TXRH), Bloomin’ Brands (BLMN), and Brinker International (EAT) posted an EBIT margin of 9.1%, 5.3%, and 8.3%, respectively.

Outlook

For the next four quarters, analysts expect Darden to post an EBIT margin of 9.9% compared to 9.6% in the corresponding four quarters of the previous year.

Next, we’ll look at Darden’s fiscal 3Q18 EPS.

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