Categories Analysis, Consumer

Darden Restaurants (DRI) sees favorable post-COVID scenario: Is stock buy?

The management recently issued strong fourth-quarter sales guidance and announced additional benefits for employees

The vaccine-driven market reopening has brightened recovery hopes for businesses that continue to feel the pinch of movement restrictions and the resultant fall in customer traffic. Being part of one of the worst-hit industries, Darden Restaurants Inc. (NYSE: DRI) slipped to a quarterly loss last year when the majority of its outlets were closed, after reporting profit consistently over the years.

Short-lived Slump

But the Lakeland, Florida-based multi-brand restaurant chain emerged from the negative territory quickly and maintained the momentum since then, supported by aggressive technology adoption and disciplined spending. Interestingly, Darden came out with better-than-expected results even during the crisis period.

Read management/analysts’ comments on Darden’s Q3 results

It seems the company, which owns popular brands like LongHorn Steakhouse and Olive Garden, benefited from its proven Back to Basics operating strategy and dedicated distribution network in navigating through the crisis.  To complement those tailwinds, it rolled out facilities like drive-in-dining and curbside pickup, besides boosting its online ordering system that was well-received by customers. In the most recent quarter, digital transactions accounted for about 19% of total sales.

From Darden Restaurant’s Q3 2021 earnings conference call:

“As we have mentioned previously, the simplifications across all of our businesses are expected to result in a 150 basis points of margin improvement with 90% of pre-COVID sales. Our business model transformation also strengthens our belief in our ability to open value creating new restaurants across all of our brands. Due to this transformation, the sales required to exceed our return expectations are much lower today.”

Bullish View

Darden’s executives are optimistic about ending fiscal 2021 on a high note, in terms of sales and earnings performance. In what could be a sign that the company is regaining lost ground, they have predicted strong fourth-quarter sales and announced additional benefits for employees.  Justifying the positive outlook, same-store sales improved in the early part of the current quarter as the vaccination drive and relaxation of restrictions encouraged more people to dine out.

Sales and profit came in above the consensus estimates in the third quarter though they decreased to $1.73 billion and 98 cents per share from the prior-year period amid concerns over the resurgence of COVID cases in some areas. With a couple of dozen new restaurants scheduled for opening, costs related to infrastructure, hiring, and marketing will partially offset the effects of sales recovery in the coming months.

Stock Peaks

Continuing the recovery that started more than a year ago, Darden’s stock hit an all-time high in March but flattened since then and dropped to the pre-peak levels. The current value is 20% above the 52-week average. The moderation in price could be a good entry point for those willing to own the stock, which is expected to grow in double digits this year. Experts believe it has the potential to add meaningful value to investment portfolios.

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DRI closed the last trading session at $134.15 and traded lower in the early hours of Monday. The stock’s value has nearly doubled in the past twelve months.

Looking for more insights on the earnings results? Click here to access the full transcripts of the latest earnings conference calls!

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