Darden Restaurants, Inc. DRI is likely to benefit from menu simplifications, an off-premise business model and technological enhancements. Also, emphasis on Cheddar’s business bodes well. However, pandemic-induced supply chain disruptions and inflationary pressures are a concern.
Let’s discuss the factors highlighting why investors should retain the stock for the time being.
Factors Driving Growth
Darden strives to attract guests by focusing on the core menu, culinary innovation and providing regional flavors. It is also working to simplify kitchen systems, improve staffing levels and operational excellence to enhance the guest experience, enable menu customizations and make smarter promotional investments. The operational readjustments are likely to drive the company’s performance going forward.
Even though capacity restrictions continue to ease, off-premise sales remained strong during third-quarter fiscal 2022. In third-quarter fiscal 2022, off-premise sales contributed 30% to total sales at Olive Garden and 16% at LongHorn. The company is benefiting from technological enhancements related to online ordering, the introduction of To Go capacity management and Curbside I'm Here notification. Given the solid feedback about better customer experience and reduced friction, the company anticipates off-premise sales to remain high for some time. The company intends to revamp its point-of-sale system to boost guest experience and manage off-premise offerings.
To reduce friction and enhance consumers’ convenience in the digital platform, Darden initiated streamlining the order pickup process and payment methods. Backed by these initiatives, online ordering increased sharply. It is also witnessing a sharp increase in To Go sales. During third-quarter fiscal 2022, 63% of all off-premise sales were placed digitally. Going forward, the improvements in the business model are likely to reinforce its ability to boost restaurant value across its brands.
Darden’s acquisition of the small restaurant chain, Cheddar's Scratch Kitchen (Cheddar's), in April 2017 added an undisputed casual dining value to its portfolio of differentiated brands. It also helped Darden enhance its scale. Further, management made significant operational readjustments 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. The company considers that Cheddar has significant prospects for long-term growth. Also, it added that it anticipates restaurant-level margins to be well in the high teens when Cheddar’s reaches 100% of the pre-COVID sales. For fiscal 2023, the company anticipates a year-over-year increase in Cheddar restaurant openings.
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Shares of Darden have declined 17.3% in the past three months compared with the industry’s 11.7% fall. The dismal performance was primarily caused by the coronavirus crisis. Notably, pandemic-induced restrictions, labor challenges and supply chain disruptions had taken an enormous toll on the company. Although most dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation regularly to gauge the impacts of COVID-19.
The company has been persistently shouldering increased expenses, which are denting margins. In the fiscal third quarter, total operating costs and expenses increased 35.5% year over year to $2,147.9 million. This escalation was primarily due to a rise in food and beverage costs, restaurant expenses and labor costs. For fiscal 2022, the company expects total inflation of 6% (up from the prior projection of 5.5%); commodities inflation of 9% (significantly up from 7-8% estimated earlier) and total restaurant labor inflation of 6-6.5%, which includes hourly wage inflation of 9% (in line with previous estimates).
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 Zacks Retail-Wholesale sector are MarineMax, Inc. HZO, BBQ Holdings, Inc. BBQ and Cracker Barrel Old Country Store CBRL.
MarineMax sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 32.8%, on average. Shares of the company have declined 23.8% in the past year.
The Zacks Consensus Estimate for MarineMax’s 2022 sales and earnings per share (EPS) suggests growth of 16% and 21.5%, respectively, from the year-ago period’s levels.
BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 18.3% in the past year.
The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.
Cracker Barrel carries a Zacks Rank #2. Cracker Barrel has a long-term earnings growth of 9.4%. Shares of the company have declined 37.8% in the past year.
The Zacks Consensus Estimate for Cracker Barrel’s 2022 sales and EPS suggests growth of 17.3% and 33.5%, respectively, from the year-ago period’s levels.
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