Darden Restaurants Reports Q1 Earnings

Darden Restaurants DRI reported its 1Q2011 earnings recently. DRI reported fiscal 1Q11 EPS of $0.80 vs. J.P. Morgan's $0.73 estimate. In J.P. Morgan's opinion overall sales do not point to a looming brand management problem or estimate misses especially as brand initiatives and lapping employment losses should allow for sequentially improving results. Margins were another story, with better than expected restaurant margins of 20.2% vs. JPM's 18.7% estimate contributing 13c of upside, driven by COGS and labor savings. Margin management continues to be DRI's major relative strength, with commodity contracts and comp leverage providing added visibility. As argued in the past, Darden did not cut corporate and store level cost structure through the 2008-2010 restaurant downturn. Therefore, JPM argues that Darden has more margin recoverability in the upturn despite the fact the margins are closer to peak than peers. Also, JPM believes Darden has the ability and willingness to cut costs if it enters a period of sales weakness and/or other costs increase. J.P. Morgan has an Overweight rating and a $52 price target on DRI. Darden Restaurants closed Tuesday at $44.02 and is trading lower in premarket. Click here to get trading ideas that could bring you a 100% return.