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Darden (DRI) Up 61% in 6 Months: Will the Rally Continue?

Zacks Equity Research
·4 mins read

Darden Restaurants, Inc.‘s DRI focus on its sales-building initiatives and technology-driven moves are likely to help the company going forward. Online sales increased sharply in the quarter. In the past six months, the company’s shares have surged 60.7% compared with the industry’s growth of 29.4%. However, dismal same-restaurant sales are a concern. Let’s delve deeper.

Factors Driving Growth

During the fourth quarter of 2020, the company rolled out online ordering facility for Cheddar's as well as for other brands that did not have this facility earlier. This also included online sales of alcohol for all brands. To reduce friction and enhance consumer convenience in the digital platform, the company initiated streamlining of order pickup process and payment methods. Backed by these initiatives, online ordering has increased sharply. In first-quarter fiscal 2021, online sales contributed almost 60% of total off-premise sales. Online sales have tripled form the last year’s levels.

Further, management made significant operational readjustment to the brand, which is expected to reap long-term benefits. Apart from making good progress with the integration of Cheddar’s, the company seems to gain more confidence in its outcome. Due to the transformation, the company is witnessing improved margin at Cheddar’s. In the current fiscal, Darden plans to make significant non-guest facing changes, which is anticipated to have an impact on restaurant level execution. Moving forward, the company considers Cheddar a significant prospect for long-term growth.

We are encouraged by Darden’s impressive earnings surprise. Notably, the company’s earnings met/surpassed the Zacks Consensus Estimate for 24 straight quarters. In first-quarter fiscal 2021, the company reported adjusted earnings per share of 56 cents per share, beating the Zacks Consensus Estimate of earnings of 5 cents. The company’s relentless efforts to augment the basic operating factors of the business — food, service and ambiance — bode well. The company expects second-quarter fiscal 2021 earnings per share in the range of 65-75 cents, which is well above the analyst’s expectations. Moreover, the stock has outperformed the industry in the past six months.

Darden Restaurants stated that it has enough liquidity to survive the coronavirus pandemic for some time. As of Aug 31, 2020, the company’s cash balance totaled nearly $655 million. Moreover, the company has access to $750.0-million credit facility, reaching the liquidity mark to more than $1.4 billion.

 

Concerns

The coronavirus pandemic is likely to hurt the company’s results in the coming quarters. Due to the social distancing protocol, traffic in second-quarter fiscal 2020 is likely to remain dismal. Dismal traffic in turn will negatively impact the company’s top and bottom lines.

In first-quarter fiscal 2021, Same-restaurant sales declined sharply at all segments due to the pandemic. Same-restaurant sales at Olive Garden, Fine Dining, LongHorn Steakhouse and Other Business declined 28.2%, 39.1%, 18.1% and 39%, respectively. Moreover, total sales declined 28.4% from the prior-year quarter’s levels due to negative blended same-restaurant sales of 29%.

Zacks Rank

Darden currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Brinker International, Inc. EAT, BJ's Restaurants, Inc. BJRI and Chuy's Holdings, Inc. CHUY. Papa John's and Chuy's Holdings Brinker sports a Zacks Rank #1, while BJ's Restaurants and Chuy's Holdings carry a Zacks Rank #2 (Buy).

Brinker has a three-five year earnings per share growth rate of 11.4%.

BJ's Restaurants has a trailing four-quarter earnings surprise of 54.9%, on average.

Chuy's Holdings 2021 earnings are expected to surge 133.8%.

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