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What Led to the Expansion of Darden’s EBIT Margin in Q2 2019?

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Second-quarter EBIT margin

During the second quarter of fiscal 2019, Darden Restaurants (DRI) posted an EBIT margin of 7.5%, an expansion of 0.4% from its EBIT margin of 7.1% in the corresponding quarter of fiscal 2018.

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EBIT margin drivers

During the quarter, Darden’s food and beverage expenses fell 0.4% due to an increase of 2% in its menu prices and cost-saving initiatives, partially offset by commodity inflation of under 1.0% and an unfavorable impact from its adoption of a new accounting standard.

Sales leverage from positive same-store sales growth lowered the company’s restaurant expenses and marketing expenses by 0.4% and 0.2%, respectively. Also during the quarter, the company’s general and administrative expenses were up 0.2%, as it had made an unfavorable legal settlement in the comparable period of the previous year.

However, some of the expansion in Darden’s EBIT margin was offset by an increase of 0.5% in its labor expenses due to labor inflation of 3.5% and higher investments in the workforce.

Peer comparison and outlook

During the same period, Texas Roadhouse (TXRH), Bloomin’ Brands (BLMN), and Brinker International (EAT) posted EBIT margins of 6.0%, 2.0%, and 4.8%, respectively.

For fiscal 2019, analysts expect Darden’s EBIT margin to expand from 9.7% in fiscal 2018 to 9.9%. Next, we’ll look at Darden’s fiscal 2019 second-quarter EPS.

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