How Will Darden Restaurants' Earnings Hold Up Amid Red Lobster Spin-Off And The Rise Of Chipotle?

| About: Darden Restaurants, (DRI)

Darden Restaurants Inc. (NYSE:DRI) is set to report FQ3 2014 earnings before the market opens on Friday, March 21st. Darden Restaurants controls a handful of US-based restaurant chains including The Olive Garden, Red Lobster, and several other smaller brands. This quarter, Darden expects lower EPS as the company will spend money on its plans to spin off Red Lobster. Legal costs and financial advisory services are expected to reduce quarterly EPS by about 6c. Other concerns for Darden Restaurants include the poor weather and the rise of competition from fast-casual restaurants such as Chipotle Mexican Grill (CMG), which posted a breakout quarter at the end of January. Here’s what investors are expecting from Darden Friday.

The information below is derived from data submitted to the platform by a set of Buy Side and Independent analyst contributors.image

(Click Here to see Estimates and Interactive Features for Darden Restaurants)

The current Wall Street consensus expectation is for Darden Restaurants to report 82c EPS and $2.251B revenue, while the current consensus from 9 Buy Side and Independent contributing analysts is 87c EPS and $2.274B in revenue. This quarter, the buy-side as represented by the community is expecting Darden Restaurants to beat the Wall Street consensus on both EPS and revenue by a comfortable margin.

Over the past 6 quarters, the consensus from has been more accurate than Wall Street in forecasting Darden Restaurants’ EPS and revenue 4 and 3 times, respectively. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non-professional investors, Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time, but more importantly, it does a better job of representing the market’s actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we are seeing a larger than usual difference between the 2 groups’ expectations.image

The distribution of estimates published by analysts on the platform range from 79c to 94c EPS and from $2.194B to $2.351B in revenues. This quarter, we’re seeing a larger distribution of estimates on Darden Restaurants.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signals less agreement in the market, which could mean greater volatility post earnings.image

Over the past 4 months, the Wall Street EPS consensus fell from $1.07 to 82c, while the Estimize consensus decreased from 94c to 87c. Meanwhile, the Wall Street revenue forecast dropped from $2.392B to $2.251B, while the Estimize forecast declined at the end of the quarter from a high of $2.342B to $2.274B. Timeliness is correlated with accuracy, and downward analyst revisions at the end of the quarter are often a bearish indicator.image

The analyst with the highest estimate confidence rating this quarter is turbinecity, who projects 83c EPS and $2.259B in revenue. In the Winter 2014 season, turbinecity is rated as the top analyst and is ranked 6th overall among over 4,000 contributing analysts. This season, turbinecity has been more accurate than Wall Street in forecasting EPS and revenue 60% and 58% of the time, respectively, throughout over 1000 estimates. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research that looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, turbinecity is expecting Darden Restaurants to beat Wall Street’s expectations but fail to live up to the consensus forecast from the Estimize community.

This quarter, the Red Lobster spin-off and the poor weather are expected to keep Darden’s earnings below levels reported in FQ3 last year. However, contributing analysts on the platform are still expecting Darden Restaurants to beat Wall Street’s expectations by a comfortable margin.

Disclosure: None