Darden Restaurants' (NYSE:DRI) fiscal second-quarter 2020 results, released Thursday morning, revealed a healthy mid-single-digit advance in revenue over the prior-year quarter. In addition, adjusted earnings increased appreciably over the comparable period. But similar to its last reporting period, the restaurant holding company's comparable sales struggled to rise meaningfully, clouding its full-year picture. As we review the last three months and discuss Darden's "comps" issues below, note that all comparative numbers are presented against the prior-year quarter.
Darden Restaurants: The headline numbers
|Metric||Q2 2020||Q2 2019||Change|
|Revenue||$2.06 billion||$1.97 billion||4.5%|
|Net income||$24.7 million||$115.6 million||(78.6%)|
|Diluted earnings per share (EPS)||$0.20||$0.92||(78.3%)|
Essential highlights from the quarter
- Comparable sales rose by 2%, improving over last quarter's 0.9% growth and lining up with Darden's year-long comps improvement goal of 1% to 2%. The organization's two largest and most important segments, The Olive Garden and Texas LongHorn, achieved comps growth of 1.5% and 6.7%, respectively.
- The Capital Grille and Eddie V's, the two chains that make up Darden's fine-dining segment, also exhibited progress, posting respective comps expansion of 1.8% and 0.5%.
- In contrast, the "Other" segment continued a trend of underperformance. Cheddar's Scratch Kitchen, Bahama Breeze, Seasons 52, and the Yard House chains recorded comparable sales growth of -1.2%, -3.4%, -3.5%, and 0.7%, respectively. This marks the third straight quarter that the Other segment has collectively posted negative same-store results.
- All of Darden's business segments reported positive year-over-year revenue improvement, with Texas LongHorn achieving the highest advance at 8.4% and Olive Garden capturing the smallest increase at 2.6%. The fine-dining segment grew revenue by 5.5%, while the Other segment expanded its top line by 3.5%. Each segment benefited from Darden's active restaurant expansion; the company had 37 additional restaurants in operation during the last three months versus the second quarter of fiscal 2019. Darden ended the period with a total of 1,799 units across its various brands.
- Operating margin improved by 30 basis points to 7.8%.
- The company took a pre-tax charge of $147.1 million related to the termination of its defined benefit pension plan. This charge is the primary driver behind the steep decline in net earnings as seen in the table above.
- After adjusting mainly for the pension termination charge, adjusted earnings per share of $1.12 increased by 22% over the diluted EPS of $0.92 earned in fiscal Q2 2019.
- The company purchased $136 million worth of its common stock during the quarter, bringing its year-to-date repurchase total after two quarters to $231 million.
Darden's management has focused on lifting the struggling comparable sales of its smaller chains this calendar year primarily by focusing on store-level execution issues, such as boosting traffic and improving customer service. In the company's press release, CEO Gene Lee observed that despite this drag, Darden's meager same-store sales growth still nudged past that of its peers this quarter, stating: "We had a good quarter with continued same-restaurant sales growth outpacing the casual dining industry benchmarks, especially at LongHorn. We continue to see that consumers are willing to visit brands with compelling value and strong guest experiences."
Darden reaffirmed its fiscal 2020 targets on Thursday, which include adjusted EPS of $6.30 to $6.45, the 1% to 2% comps growth mentioned earlier in this article, and year-over-year revenue growth of 5.3% to 6.3%.
Due to the slight comps progress so far this year, total revenue through six months has advanced just 3.8% over the same period in fiscal 2019, meaning that the company will really need to ramp up sales in the back half of the year to meet its full-year revenue target range. Shareholders appear skeptical regarding the restaurant operator's ability to quickly juice sales over the next two quarters: Darden shares were trading down by roughly 4% in midmorning trade on Thursday.