Weak Comparable Sales Mar Darden Restaurants' Quarter

Darden Restaurants (DRI -0.28%) launched its new fiscal period with results that fell behind the pace needed to meet its own financial performance goals for the year. In addition, the restaurant holding company saw imbalanced results among its various brands, as the segment holding several smaller restaurant chains turned in weaker sales growth against the Olive Garden, Texas LongHorn Steakhouse, and fine-dining segment. As we break down the quarter, note that all comparative numbers are presented against the prior-year quarter.

Darden Restaurants: The raw numbers

Data source: Darden Restaurants.

What happened this quarter?

• Darden's 3.4% sales improvement fell short of its year-long goal of increasing revenue by 5.3% to 6.3% over fiscal 2019. The nearly 4% diluted earnings-per-share (EPS) advance also trailed the organization's full-year goal of 11% growth in EPS.
• The company's comparable sales expanded by just 0.9%, below its expected 2020 rate of 1% to 2% growth. The Olive Garden and Texas LongHorn segments posted comps of 2.2% and 2.6%, respectively. The Capital Grille and Eddie V's, which together comprise Darden's fine-dining segment, achieved comps of 1.5% and 1.2%, respectively.
• However, the company's "other" segment (which contains the Cheddar's Scratch Kitchen, Bahama Breeze, Seasons 52, and Yard House brands) turned in another quarter of disappointing comparable sales. Comps of chains in the other segment fell by 4% on average, led by Cheddar's Scratch Kitchen, which saw a 5.4% comparable sales decline. As I discussed in my earnings preview, management is attempting to improve execution issues at Cheddar's to boost traffic. On a more global basis, it's worth noting that this is the second straight quarter of negative comps among all of the other segment chains.
• The restaurant conglomerate opened eight new units during the quarter, bringing its base at period-end to 1,793 stores. This represents growth of 40 restaurants over the end of the first quarter of 2019. Darden aims to open 44 net new restaurants this year.
• Restaurant margin (i.e., sales less direct expenses such as food and beverage costs, labor, rent, etc.) slipped just 10 basis points to 21.3%. Holding restaurant margin steady is central to maintaining Darden's vigorous cash flow generation, so the current number represents a positive result for the quarter.
• Operating margin improved by 20 basis points to 9.4%, assisted by the higher sales level as well as lower general and administrative expense against the prior-year period.
• Darden repurchased roughly $95 million of its own stock during the quarter. The company's board approved a new authorization allowing for the repurchase of up to $500 million of Darden's common stock.

Image source: Getty Images.

What management had to say

Though investors were wary of the anemic comps -- shares were down 5% at midday on Thursday -- CEO Gene Lee pointed out that the company was able to take market share from competitors during the period. Lee stated the following in Darden's earnings press release: "I'm pleased with our results this quarter as we continued to gain market share. Our teams remained focused on improving the guest experience by focusing on our back-to-basics operating philosophy and leveraging our competitive advantages, all while managing costs effectively."

Looking forward

Despite a faltering start to fiscal 2020, Darden has fared well among restaurant stock investments this year. Even factoring in today's share decline, the DRI symbol is up roughly 22% year to date. Going forward, management reaffirmed that it intends to hit the various full-year targets mentioned above, including 5.3% to 6.3% revenue growth, 1% to 2% comps growth, and diluted EPS of between $6.30 and $6.45 (representing 11% expansion at the midpoint). Executives will undoubtedly focus on noncore brands in the coming quarters to reduce their drag on total company performance and to ensure that Darden does indeed make good on its fiscal 2020 guidance.