Darden Restaurants, Inc. DRI is benefiting from sales boosting initiatives, Cheddar’s business model transformation and efforts to attract Guests at LongHorn and other units. Consequently, the company’s shares have gained 19.8% year to date, compared with the industry’s rally of 8.4%. However, dismal same-restaurant sales remain a woe. Let’s delve deeper.
The company is gaining from Cheddar’s business model transformation. After from making good progress with the integration of Cheddar’s, the company seems confident regarding its outcome. Due to the transformation, the company is witnessing improved margin at Cheddar’s. Darden considers Cheddar a significant long-term prospect. The company is also witnessing sharp increase in To Go sales.
The company announced that across the Darden, its hourly labor productivity has improved by over 20%, with Cheddar’s increasing over 30%. Due to Cheddar’s business model transformation, Cheddar’s the restaurant level margins has improved over 300 basis points year to date through the third quarter. The company also added that when Cheddar’s reaches 100% of the pre-COVID sales, it anticipates restaurant level margins to be well in the high teens.
At LongHorn, the company strives to attract guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on its marketing strategy to improve execution, customer relationship management and digital advertising, and a strong promotional pipeline that leverage the segment’s expertise. Further, the company remains committed to strengthening its in-restaurant execution through investments in quality and simplification of operations in order to enhance guest experience. Sales are being driven by various initiatives and personalized services, which are likely to aid long-term growth as well.
Maintaining liquidity during the pandemic remains a herculean task during the pandemic. Darden stated it has enough liquidity to survive the coronavirus pandemic for some time. As of Feb 28, 2021, the company’s cash balance totaled nearly $994 million, compared with $777 million as of Nov 29, 2020. Lately, it has been generating positive cash flow, adding to the positives. As of Feb 28, 2021, the company’s long-term debt stands at $929.7 million compared with $929.4 million at the end of Nov 29, 2020. At the end of third-quarter fiscal 2021, the company had total debt-to-capital ratio of 0.27, which highlights that its debt levels are manageable.
Dismal same-restaurant sales remain a major concern. In third-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 fell 25.8%, 45.2%, 12.6% and 36.9%, respectively. Moreover, total sales also slumped 26.1% from the prior-year quarter’s levels due to negative blended same-restaurant sales of 26.7%.
For the week ended Feb 28, Mar 7, Mar 14 and Mar 21, comps at Darden declined 15.9%, 13.9%, 11.1% and up 5.4%, respectively. Meanwhile, comps at Olive Garden for the week ended Feb 28, Mar 7, Mar 14 and Mar 21 were down 17.4%, 15.3%, 11.6% and up 5.7%, respectively.
Zacks Rank & Key Picks
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 Chuy's Holdings, Inc. CHUY, Bloomin' Brands, Inc. BLMN and Texas Roadhouse, Inc. TXRH, each sporting a Zacks Rank #1.
Chuy's Holdings has a trailing four-quarter earnings surprise of 127.6%, on average.
Bloomin' Brands 2021 earnings are expected to soar 391.3%.
Texas Roadhouse has a three-five year earnings per share growth rate of 10%.
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