Darden Restaurants Earnings: What to Watch

Darden Restaurants (NYSE: DRI) stock has trounced the market lately, doubling since mid-2016 while the S&P has risen about 40% in that same period. That rally was supported by surprisingly strong growth in market share over the past year. The owner of the Olive Garden and LongHorn Steakhouse franchises also found ways to increase profitability in fiscal 2019 despite pressure from labor and food costs as well as a generally weak full-service dining industry.

The company projected another year of solid growth, and that's just one number that investors will judge the company against when it announces fiscal first-quarter results on Thursday, Sept. 19. Let's take a closer look.

A steak dinner.

Image source: Getty Images.

Balanced growth

Comparable-store sales growth landed at 2.5% in the most recent fiscal year to mark a solid beat over management's initial target of between 1% and 2% growth. Its two biggest franchises led the way, with Olive Garden boosting comps by 4% and LongHorn rising 3.3%. Those gains aren't far from the comps that fast-food leader McDonald's enjoyed in recent quarters. And they're arguably more impressive given slower growth in the full-service segment of the restaurant industry.

But Darden has the same challenge that Mickey D's is dealing with in its key U.S. market. Customer traffic growth is disappointingly low. Guest counts were flat for both Olive Garden and LongHorn, meaning most of the chains' growth came from higher prices rather than more diner visits. That means investors will be watching on Thursday for signs that growth can come from a more sustainable blend of higher prices and increased customer traffic.

Restaurant returns

Darden is still expecting robust sales growth in the new fiscal year despite the projected comps slowdown, and to get to that result, the chain is prepared to open 44 new restaurants, versus 39 in the prior year.

The best way to judge whether those stores can produce solid returns -- besides following customer traffic trends -- is watching the chain's profitability. Management has found a few prime cost-cutting initiatives that, together with rising menu prices, pushed operating margin up to a new high in fiscal 2019. If Darden can keep that metric in the low double-digits, investors are likely to continue pushing its stock returns ahead of its peers.  

The updated outlook

Darden's initial reading of fiscal 2020 called for sales growth to slow to around 1.5% at existing locations with earnings improving to between $6.30 and $6.45 per share. At the midpoint, that forecast implies 10% profit growth compared with last year's 21% spike.

Both the top and bottom-line predictions could change on Thursday to account for the latest trends that CEO Gene Lee and his team are seeing around guest traffic, responsiveness to new menu items, and pricing. It's a safe bet to assume the competition will be targeting its niche aggressively this year in a bid to win back some of the market share that the chain soaked up in the past year.

Holding on to those gains, let alone extending them, would mean the company has hit on a durable growth approach that could deliver robust investor returns. The better news is that these profits will likely be amplified once the full-service dining industry starts expanding again.

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Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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