Darden Restaurants (DRI 1.70%) 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 (CMG 2.15%) 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 (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 (EAT -0.30%) 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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