Will Darden (DRI) Pull Off A Surprise Again In Q4 Earnings?

We expect Darden Restaurants, Inc. (NYSE:DRI) to beat expectations when it reports fourth-quarter fiscal 2017 financial numbers on Jun 27, before the opening bell.

Last quarter, Darden delivered a 3.94% positive earnings surprise. In fact, the company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 3.35%.

Darden Restaurants, Inc. Price and EPS Surprise

Why a Likely Positive Surprise?

Our proven model shows that Darden is likely to beat on earnings because it has the perfect combination of the two key ingredients.

Zacks ESP: Earnings ESP for Darden is +1.74% because the Most Accurate estimate is $1.17, while the Zacks Consensus Estimate is pegged at $1.15. This is a meaningful indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Darden currently has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 combined with a positive Earnings ESP have a significantly higher chance of beating earnings estimates. You can see the complete list of today’s Zacks #1 Rank stocks here.

Note that we caution against stocks with Zacks Ranks #4 or 5 (Sell rated) going into an earnings announcement.

The combination of Darden‘s favorable Zacks Rank and positive ESP makes us reasonably confident of an earnings beat.

What is Driving the Better-than-Expected Earnings?

Positive comps growth and costs-saving initiatives are driving the bottom line and are expected to boost the fiscal fourth quarter results as well. Notably, Darden’s earnings have surpassed the Zacks Consensus Estimate over the last 10 consecutive quarters.

Meanwhile, management has been focusing on improving core operating fundamentals with initiatives like simplifying kitchen systems, better in-restaurant execution to enhance guest experience, menu innovation, remodeling, along with various technology-driven moves. Backed by these initiatives, most of Darden’s brands have been witnessing growth over the past few quarters. We thus expect the trend to also continue in the to-be-reported quarter.

However, increased labor costs and a non-franchised business model may dent the company’s profits, while a soft consumer spending environment in the U.S. restaurant space might restrict revenue growth.

Notably, on Apr 24, Darden completed its acquisition of small restaurant chain, Cheddar's Scratch Kitchen. Now, it remains to be seen how the acquisition would impact the company’s performance in the fiscal fourth quarter as about one month of Cheddar’s operations would be included in Darden’s fiscal fourth quarter results.

In the fiscal third quarter conference call, the company had announced that it expected earnings per share for the fiscal fourth quarter to be in the range of $1.11 and $1.16, while restaurant sales growth was projected to be in the band of 2-3%. These projections excluded the impact of Cheddar’s purchase.

Stocks to Consider

Darden is not the only company looking up this earnings season. Here are some other restaurant companies to consider as our model shows that they also have the right combination of elements to post an earnings beat this quarter:

McDonald’s Corporation (NYSE:MCD) has an Earnings ESP of +4.94% and a Zacks Rank #3.

Domino’s Pizza, Inc. (NYSE:DPZ) has an Earnings ESP of +1.64% and a Zacks Rank #2.

Panera Bread Company (NASDAQ:PNRA) has an Earnings ESP of +1.67% and a Zacks Rank #3.

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