Why Darden Restaurants’ Q2 Earnings Weren’t Impressive

Darden Restaurants (DRI) reported better-than-expected earnings for the second quarter of fiscal 2020 on Thursday. However, the stock fell 6.3%. The company’s overall sales and same-store sales fell slightly short of the expectations.

Darden Restaurants’ revenues grew 4.2% YoY (year-over-year) to $2.06 billion and missed analysts’ estimate by 0.3%. The company’s overall same-store sales grew 2.0%, while Wall Street expected 2.1% growth. Weakness in smaller chains impacted the company’s top line.

As of Thursday, Darden Restaurants stock has risen 9.2% year-to-date. After the second-quarter results, some analysts lowered their target price for Darden stock:

• Wedbush lowered its target price to $120 from $125.
• Guggenheim lowered its target price to $133 from $135.
• RBC lowered its target price to $134 from $135.
• Stephens lowered its target price to $115 from $125.
• Deutsche Bank lowered its target price to $118 from $123.

Darden Restaurants’ adjusted EPS grew 21.7% YoY to $1.12 and beat analysts’ forecast of $1.07. Higher sales and operating margin expansion drove the second-quarter earnings growth. The company’s operating margin grew by 30 basis points YoY to 7.8% due to effective cost management and higher pricing. However, higher marketing expenses had a negative impact on the operating margin.

Darden Restaurants’ overall sales growth of 4.2% reflected the addition of 37 new restaurants (on a net basis) and higher same-store sales. Olive Garden’s same-store sales grew 1.5%, while its overall sales rose 2.6%. Olive Garden is the company’s largest segment and accounted for about 50% of its second-quarter sales.

Darden Restaurants wants to improve Olive Garden’s performance through efficient operational execution, a focus on consumers’ convenience, and value offers. Strong demand for the chain’s $5 take-home offer helped drive a 17% rise in Olive Garden’s off-premise sales. The digital sales grew 33% in the third quarter. Olive Garden also experienced demand for the newly launched weekday launch menu offer with 21 options under $10.

LongHorn Steakhouse generated same-store sales growth of 6.7%, which marked growth for the 27th consecutive quarter. The restaurant’s overall sales grew 8.4%. Enhanced core menu items, a focus on quality, and efforts to simplify operations drove the chain’s strength.

The Fine Dining business, which includes The Capital Grille and Eddie V’s restaurants, generated sales growth of 5.5%. The top line gained from new restaurants and higher same-store sales. The Capital Grille and Eddie V’s brands delivered same-store sales growth of 1.8% and 0.5%, respectively.

Sales from Darden Restaurants’ other businesses grew 3.5% YoY due to the addition of new restaurants. However, same-store sales of Cheddar’s Scratch Kitchen, Seasons 52, and Bahama Breeze fell 1.2%, 3.5%, and 3.4%, respectively.

Darden Restaurants expects fiscal 2020 sales growth between 5.3% and 6.3%. The company expects same-store sales growth of 1%–2%. Darden Restaurants intends to add 44 net new restaurants (net of stores closed) in the current fiscal year. The company expects the adjusted EPS from continuing operations to between $6.30 and $6.45.

While Darden Restaurants reaffirmed its fiscal guidance, investors seemed concerned about lower customer traffic in its Olive Garden restaurants. In the second quarter, Olive Garden’s overall sales gained from higher prices and a favorable menu mix. However, the chain experienced a 1.2% fall in customer traffic.

Meanwhile, Chipotle Mexican Grill (CMG) stock has risen 93.1% YTD. The company reported strong third-quarter results in October. Chipotle’s revenues grew 14.6% YoY to $1.40 billion, while the adjusted EPS rose about 77% to $3.82. New menu offerings, strong digital sales, and an expanded store footprint helped drive Chipotle’s sales.