What to Expect When Darden Restaurants Reports

Heading into earnings, investors are probably wondering what to do with their shares of Darden. Is now the time to go all in or would DineEquity or Brinker International provide investors with more attractive prospects?

Jun 18, 2014 at 6:00PM


Source: Olive Garden

Jun. 20, 2014 is bound to be a pretty big day for investors holding shares in Darden Restaurants (NYSE:DRI). Prior to the market opening, the restaurant conglomerate's management team will be releasing revenue and earnings results for the fourth quarter of the company's 2014 fiscal year. With this in mind, the Foolish investor is probably trying to figure out what to do. Should he/she sell the company's shares and buy into a rival like DineEquity (NYSE:DIN) or Brinker International (NYSE:EAT) or does Darden have what it takes to soar higher, even in spite of its pending sale of Red Lobster?

Mr. Market's expectations are mixed
If analysts are correct, Darden will report revenue of $2.33 billion for the quarter. If this forecast comes to fruition, it will represent a 1% improvement over the $2.30 billion management reported the same quarter last year. More likely than not, this would be due to its core restaurants like Olive Garden and Red Lobster seeing sales decrease while smaller chains like Bahama Breeze and Eddie V's continue their growth spurt.

  Forecasted Last Year's Results
Revenue $2.33 billion $2.30 billion
Earnings per Share $0.94 $1.01

Source: Yahoo! Finance

From an earnings perspective, analysts are even more pessimistic about Darden. For the quarter, Mr. Market expects the restaurant chain to post earnings per share of $0.94, 7% below the $1.01 the business reported during the fourth quarter of its 2013 fiscal year. Despite seeing slightly higher revenue, the company will likely see its margins fall because of its bigger chains, which tend to have higher margins themselves, posting smaller revenue and, potentially, impairments.

Is Darden a better treat than the rest?
Over the past four years, Darden has seen some decent revenue growth. Between 2010 and 2013, the company saw its revenue climb 20% from $7.1 billion to $8.6 billion. According to the company's financial statements, this top line improvement came from slight increases in its Olive Garden and Red Lobster chains, but was mostly attributable to a 39% jump in its LongHorn Steakhouse operations and a 165% rise in its Specialty Restaurant Group.

DRI Revenue (Annual) Chart

DRI Revenue (Annual) data by YCharts

While Darden's revenue growth was pretty good over this four-year period, its bottom line wasn't anything to brag about. Between 2010 and 2013, the company saw its net income rise by just 2% from $404.5 million to $411.9 million. Despite its higher revenue, Darden was negatively affected by its cost of goods sold, which inched up from 77.1% of sales to 77.9%.

Over a similar four-year period, rival DineEquity saw its revenue fall a jaw-dropping 52% from $1.3 billion to $640.5 million. Although this seems disastrous at first glance, the parent of Applebee's and IHOP has been transitioning to a business model whereby 99% of its locations have been refranchised as opposed to remaining company-owned. The downside to this approach is that it results in less revenue but, since the company takes some off the top of its franchisees, it leads to higher margins.


Source: Olive Garden

This is exactly what DineEquity has seen during this timeframe. Between 2010 and 2013, the restaurant chain saw its net income jump from a loss of $2.8 million to a gain of $72 million. Despite being hit by lower sales, the company's margins improved drastically, especially its cost of goods sold, which fell from 67.8% of sales to 42.3%.

Another interesting player in the food business in recent years has been Brinker International. Over the past four years, the parent of Chili's saw its revenue dip down just 0.4% from $2.86 billion to $2.85 billion. This slight dip in sales came in response to a 5% rise in the number of franchised locations the business recorded, but was offset by comparable store sales declines in 2011, followed by stronger performance in 2012 and 2013 that sent sales higher.

DRI Net Income (Annual) Chart

DRI Net Income (Annual) data by YCharts

In light of the restaurant's decision to increase its ratio of franchised to company-operated locations, management has been able to increase its bottom line by 19% from $137.7 million to $163.4 million. By adopting this practice, Brinker International saw its cost of goods sold fall from 84.1% of sales to 81%.

Foolish takeaway
Heading into earnings, investors are right to worry about Darden. Yes, the company has had a nice run-up in revenue compared to its peers, but with its two largest (soon to be one after the company finishes its sale of Red Lobster) restaurants seeing sales drop and with margins contracting, an investment in the firm is not without risk. While it is possible that Darden could prove to be an attractive long-term investment, for the Foolish investor interested in rising profits, DineEquity and Brinker International make for good prospects to analyze further.

Top dividend stocks for the next decade

Right now, Darden offers investors a hefty 4.4% yield.  While this is a nice incentive to own the company's stock, there are other businesses out there whose yields are bigger and that have the potential to pay them out for years to come!

The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information