Darden Restaurants (DRI 116.28, -1.61, -1.36%) touched all-time
highs this morning after the company raised its fiscal 2019 outlook and beat
market expectations for the first quarter.
Specifically, the Olive Garden owner reported first quarter earnings per share of $1.34/share on revenue growth of 6.5% to $2.06 bln, both ahead of market expectations.
What’s more, blended same-restaurant sales increased 3.3% also beat Street expectations, helped by better than expected performances from Olive Garden, LongHorn Steakhouse, and the company’s other fine dining businesses. However, comps were dragged slightly by a -4.0% showing out of the rebuilding Cheddar’s Scratch Kitchen.
Cheddar's Scratch Kitchen had total sales growth of 6.5% driven by organic new restaurant growth and franchise restaurant acquisition growth of 10.5% but offset by the aforementioned same restaurant sales decline of 4%. The original company restaurants were down 2.3%, and the formally franchised restaurants were down 6.7%. Darden management commented that it acquired Cheddar's because the chain was a value leader in casual dining with tremendous growth potential. Management feels that sentiment is as true today as it was 17 months ago.
Moving to the segment performance, Olive Garden, LongHorn, and the Fine Dining segment all grew sales and profit in the quarter driven by positive same-restaurant sales and net new restaurants. Segment profit margin increased in each of these segments, even after incremental workforce investments have been accounted for, by leveraging the growth in same restaurant sales and by managing costs effectively. Sales for Darden’s Other business segment grew 7.1%, driven by net new restaurants and the purchase of 11 Cheddar's franchise restaurants in the second quarter of last year. Segment profit margin declined 120 basis points in this segment due to margin deleverage from negative same-restaurant sales (primarily at Cheddar's), incremental workforce investments, and the adoption of revenue recognition.
In regard to the guidance increase, Darden improved both its total sales outlook, bumping estimates up to between 5-5.5% from the previous 4-5%, and same-restaurant sales outlook, now anticipated to arrive between 2-2.5% from previous forecasts of 1-2%. The company also increased its outlook for diluted average common shares outstanding for the year to approximately 126 mln, related to higher than normal stock option exercises and increased share dilution due to its stock price increase, all culminating in an increase in diluted net EPS between $5.52-5.65 from the previous $5.40-5.56.
So it would appear that, despite increased competition from delivery offerings – like Grubhub (GRUB 137.12, +0.56, +0.4%) and Uber Eats, and more casual dining peers – like McDonald’s (MCD 159.94, +0.76, +0.5%), Sonic (SONC 36.64, +0.18, +0.5%), and Yum Brands (YUM 88.93, +0.38, +0.4%) – Darden managed to put together a quarter which saw both increased traffic as well as better comps. The continuing transformation at Cheddar’s and the management of Olive Garden’s promotions will be key for Darden to continue its recent run.
Shares have come off their best levels of the session in recent trade, down 1.1% on Thursday, but still remain up about 20% YTD.