Darden Restaurants, Inc. DRI is gaining from business model enhancements, menu simplifications and technological enhancements in online ordering. Consequently, the stock has gained 29.1% compared with the industry’s growth of 19.2%. However, inflationary pressures are concerning.
The Zacks Rank #3 (Hold) company has an impressive long-term earnings growth rate of 10.1%. In fiscal 2023, DRI’s sales and earnings are likely to witness growth of 8.9% and 7.3% year over year, respectively.
In order to boost the performance of the Olive Garden brand, management implemented a set of initiatives under its Brand Renaissance Plan. The revamped restaurants are already generating high same-restaurant sales and returns.
Meanwhile, Darden Restaurants is also focusing on technology-driven actions like system-wide rollout of tablets to capitalize on digitization, which has rapidly penetrated the U.S. fast-casual restaurant sector. This has been providing a boost to its sales for the past few quarters. Backed by business-model improvements, sales at Olive Garden increased 13.9% year over year to $1,301.2 million in third-quarter fiscal 2023.
Increased focus on off-premise business bodes well. During third-quarter fiscal 2023, off-premise sales contributed 26% to total sales at Olive Garden, 14% at LongHorn and 12% at Cheddar's Scratch Kitchen. The company has been benefitting from technological enhancements regarding online ordering and To Go capacity management. Given the solid feedback on account of enhanced customer experience and reduced friction, management expects off-premise sales to remain elevated for some time.
On the other hand, Darden Restaurants strives to attract guests by focusing on core menu and culinary innovation. Availability of regional flavors is an added positive. It is also working on simplifying kitchen systems, improving sales planning and scheduling, enhancing guest experience, allowing menu customizations and making smarter promotional investments.
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Despite solid cost management, higher labor costs due to increased wages are expected to keep profits under persistent pressure. Also, the company anticipates inflationary costs to persist for the remainder of the year.
In third-quarter fiscal 2023, total operating costs and expenses increased 13.4% year over year to $2,436.3 million. A rise in food and beverage costs (owing to commodities inflation of approximately 9%), restaurant expenses (due to supply-chain challenges and utility inflation) and labor costs primarily resulted in this escalation. For fiscal 2023, the company expects total inflation of 7-7.5% and commodities inflation between 9.5-10%.
Some better-ranked stocks in the Zacks Retail-Wholesale sector are Chipotle Mexican Grill, Inc. CMG, Arcos Dorados Holdings Inc. ARCO and Chuy's Holdings, Inc. CHUY. While CMG sports a Zacks Rank #1 (Strong Buy), ARCO and CHUY carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Chipotle has a long-term earnings growth rate of 31.8%. The stock has improved 47.7% in the past year.
The Zacks Consensus Estimate for CMG’s 2024 sales and EPS suggests growth of 12.4% and 19.6%, respectively, from the year-ago period’s levels.
Arcos Dorados has a long-term earnings growth rate of 9.5%. The stock has gained 15.2% in the past year.
The Zacks Consensus Estimate for ARCO’s 2023 sales and EPS suggests improvements of 13.4% and 4.4%, respectively, from the year-ago period’s levels.
Chuy’s Holdings has a trailing four-quarter earnings surprise of 23.4%, on average. Shares of CHUY have surged 59.7% in the past year.
The Zacks Consensus Estimate for Chuy’s Holdings’ 2023 sales and EPS suggests rises of 9.9% and 24.8%, respectively, from the year-ago period’s levels.
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