Darden Stock Fell Due to Weak Fiscal 2020 Guidance

Darden Restaurants

On June 20, Darden Restaurants (DRI) reported its fourth-quarter results. For the quarter ending May 26, the company posted an adjusted EPS of $1.76, which beat analysts’ expectation of $1.73. However, the company’s revenues of $2.23 billion were below analysts’ expectation of $2.24 billion. Darden Restaurant’s overall SSSG (same-store sales growth) was 1.6%, which fell short of analysts’ expectation of 2.4%. After reporting the fourth-quarter earnings, the company’s management set its EPS guidance for fiscal 2020 at $6.30–$6.45, which was lower than analysts’ expectations of $6.46. The lower-than-expected fourth-quarter sales and weak fiscal 2020 guidance likely caused the company’s stock price to fall. Darden Restaurants was trading ~4.6% down in pre-market trading.

Darden Stock Fell Due to Weak Fiscal 2020 Guidance

Revenue growth

Darden Restaurants’ revenues increased 4.5% year-over-year to $2.23 billion. The net addition of 39 restaurants in the last four quarters and positive SSSG of 1.6% drove the company’s revenues. During the quarter, the company’s SSSG was driven by positive SSSG from Olive Garden, LongHorn Steakhouse, The Capital Grille, and Eddie V’s. However, Cheddar’s Scratch Kitchen, Yard House, Seasons 52, and Bahama Breeze reported a decline in their same-store sales.

EPS growth

For the quarter, Darden Restaurants reported a diluted EPS of $1.67. However, removing unusual items, the company’s adjusted EPS was $1.76—a rise of 26.6% from $1.39 in the first quarter of fiscal 2018. The revenue growth, expanded EBIT margin, lower effective tax rate, and lower number of common shares outstanding drove the company’s EPS during the quarter. The company’s EBIT margin improved from 10.9% to 11.0%. Darden Restaurants’ effective tax rate was 4.2%—compared to 20.4% in the same quarter of fiscal 2018. In fiscal 2018, the company repurchased 1.9 million shares for $208 million, which lowered the number of shares outstanding.

Outlook

Darden’s management expects its revenues to rise 5.3%–6.3% in fiscal 2020, which has 53 weeks of operation. The company expects its same-store sales to rise 1%–2%. Darden Restaurants plans to add 44 net new restaurants during this period. For fiscal 2020, the company expects its EPS to be $6.30–$6.45.