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Olive Garden Stock Has a Lot to Prove on Thursday

Rick Munarriz, The Motley Fool

It's a quiet week on the earnings front, giving us more time to see how much bread Darden Restaurants (NYSE: DRI) is packing in its unlimited-breadsticks basket. The parent company of Olive Garden, LongHorn Steakhouse, and other casual-dining concepts will serve up its fiscal first-quarter financials on Thursday morning. It will also host its quarterly earnings call just ahead of the market open.

Darden has been a surprisingly consistent winner for investors. The stock is working on its 11th consecutive year of rising on a dividend-adjusted basis. This is an impressive run considering the past decade includes the unceremonious sale of Red Lobster, fighting and losing a proxy battle with activist investors, and the so-called restaurant recession

Exterior shot of an Olive Garden with an empty parking lot.

Image source: Olive Garden.   

From a to ziti

Cranking out 11 years of positive shareholder returns isn't the only impressive streak here. Darden is coming off of 15 straight quarters of positive comps at its flagship Olive Garden chain, a notable run that it naturally hopes to extend to a sweet 16 later this week. 

Analysts see revenue rising at a modest 5% clip to hit $2.03 billion. A return to single-digit percentage growth after four straight quarters of double-digit upticks isn't a deal breaker. The real turnaround here is taking place at the bottom line where this should be another quarter where bottom-line gains outpace revenue spurts. Wall Street's holding out for a profit of $1.23 a share, up 24% from the prior year's showing. 

There will be plenty to break down beyond the numbers. Cheddar's -- the chain that Darden acquired last year in a $780 million transaction and is its third-largest concept -- was the only chain to post negative comps last time out. Was it able to bounce back? 

Olive Garden's focus through fiscal 2018 has been simplification. Is it succeeding in getting core customers to keep coming back with a steadier menu? Was last week's pasta pass sale more about buzz than business? Are takeout and delivery sales continuing to grow faster than in-restaurant transactions?

Darden has been pretty good at coming up with the right answers. At least nine analysts jacked up their price targets after Darden's last quarterly report, and at least one Wall Street pro is getting the jump on his peers this time around. John Staszak at Argus is boosting his price target from $125 to $140. He sees the success that Darden has been having at Olive Garden with aggressive pricing and lower costs can be ported across its seven other concepts. He is lifting his profit forecasts through the next two fiscal years. 

Expectations are high. Darden will likely have to lift its initial guidance for fiscal 2019 that it initiated three months ago to justify its recent gains. There are too many winning streaks going strong for Darden to pull back now.  

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.