Can Darden Earnings Rebound?

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Darden Restaurants (NYSE: DRI  ) will release its quarterly report on Friday, and expectations among investors aren't all that high. Yet even if Darden earnings fall from last year's levels, the longer-term question is how well the company can adapt to changing conditions in the casual-dining industry.

Darden is the name behind some of the most popular sit-down restaurant chains in the U.S., including Olive Garden, Red Lobster, and LongHorn Steakhouse. After having suffered during the recession as diners sought lower-cost options, Darden has stood to benefit from improving economic conditions. Yet strong competition has also held the company back. Let's take an early look at what's been happening with Darden over the past quarter and what we're likely to see in its report.

Stats on Darden

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$2.20 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Will Darden earnings feed shareholders better this quarter?
Analysts have been increasingly pessimistic in recent months about Darden earnings prospects, cutting their August-quarter estimates by $0.12 per share and their full-year fiscal 2014 projections by $0.20 per share. The stock has fallen in concert, posting a 5% decline since mid-June.

Much of that decline came after the company announced May-quarter results. The Olive Garden and Red Lobster chains saw rising traffic counts for the first time in six months, helping to recover from an ugly winter that included both rising taxes and higher gas costs. But more broadly, profits fell 12% for the quarter despite 11% higher overall sales and positive same-restaurant sales figures at all three of its major segments.

The rise of the fast-casual segment has also struck hard at Darden's core business. Chipotle Mexican Grill (NYSE: CMG  ) helped pioneer the segment, producing huge growth rates as customers were content to accept a limited menu of high-quality offerings in exchange for greater convenience. Similarly, Panera Bread (NASDAQ: PNRA  ) has been expanding its food menu with dishes like pasta, hitting directly at Olive Garden's spaghetti-and-breadsticks focus. More recently, a wave of newly public restaurant chains has flooded the stock market, each with high aspirations to spread and expand their presence beyond their currently limited scope. Darden isn't the only company to feel the pinch, as rival Chili's operator Brinker (NYSE: EAT  ) has also seen lackluster comps and earnings and revenue growth. Darden's full-service restaurants will have to demonstrate an ability to provide exceptional service and quality to match up with these new competitors.

The real question facing Darden, though, is whether consumers will embrace the full-service dining experience once the economy improves enough to let them take advantage of it. In addition to their speed, Panera and Chipotle have the benefit of counter service that avoids add-on costs like tipping. If consumers get used to the benefits of their frugality, they might not switch back even when their wallets get thicker.

In the Darden earnings report, watch to see how well the company is able to sustain positive trends from its biggest brands. If Olive Garden and Red Lobster start to deteriorate again, it could spell big trouble for Darden's future.

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Click here to add Darden to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 18, 2013, at 11:22 PM, Baldurdash wrote:

    I worked in 2 restaurants for them years ago. Mostly Olive Garden. They treat their employees like garbage. No benefits, randoms schedules like work till 2am then open at 8am. If someone injured they'll tell them to wrap it up and get back to work. Worst of all, having something contagious, like pink-eye, the flu, etc is NO EXCUSE NOT TO WORK as a cook! I'm 100% honest here. Then there is the terrible pay for the amount of work. Those jopbs are so bad and the owners/corporate people are making so much bank off of this almost slave labor. They sicken me.

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