On the heels of last Friday’s solid earnings announcement, Darden Restaurants (NYSE:DRI) announced that it is transforming its supply chain with the latest technology to save the company up to $45 million every year. Despite sagging business at some of its restaurant chains, will this make Darden an appetizing pick for growth investors? Let’s find out.
Many have heard of American restaurant chains Olive Garden, Red Lobster or Longhorn Steakhouse, but few know that they are all owned and operated by Darden Restaurants.
Based in Orlando, Florida this company rakes in $8 billion in annual sales but spends more than $3 billion per year on food and supplies. The company is looking to integrate its chains through order software to reduce waste; Darden aims to reduce costs by 1.5% in the next year.
While Darden’s 3.4% annual dividend yield is the second-best in the Restaurants Industry, this is a middle-of-the-road company on most other fronts. Darden’s main competitor is Applebee’s and IHOP owner DineEquity (NYSE:DIN).
If you compare these stocks side-by-side in my Portfolio Grader tool, you’ll see that Darden is a B-rated buy while DineEquity is a C-rated hold. Interestingly enough, DineEquity outpaces Darden in terms of operating margin growth, earnings surprises, earnings momentum and cash flow.
However, Darden is doing much better in terms of sales growth and buying pressure for this stock is much stronger, so this company comes out on top overall.
Despite floundering growth at its Olive Garden and Red Lobster chains, Darden managed to turn a profit in the fourth quarter thanks to robust growth at its Longhorn Steakhouse chain as well as its Specialty Restaurant Group.
Compared with the same quarter last year, earnings climbed 15% to $151 million or $1.15 per share. This was in line with the consensus estimate. Over the same period, the companies sales rose 4% to $2.07 billion, slightly missing the $2.11 billion consensus estimate. Pleased with these results, management increased its quarterly dividend payment by 16%. Shareholders of record on July 10 will receive 50 cents per share on August 1.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. For much of the past year this stock has been at a hold. That’s due to a combination of lackluster fundamentals and lukewarm buying pressure.
In the past quarter, buying pressure for DRI has firmed up, so it currently receives a B for its Quantitative Grade. On the fundamentals side, there are plenty of areas of improvement. While Darden Restaurants has nailed down its return on equity and earnings growth, its track record of beating earnings surprises and cash flow are quite weak.
Darden also receives Cs for its sales growth, operating margin growth, earnings momentum and analyst earnings revisions. All-in-all, Darden receives a C for its Fundamental Grade and a B for its Quantitative Grade.
As of this posting, June 25, I consider DRI a B-rated Buy. However, if you buy into this stock I recommend that you keep a close eye on buying pressure (indicated by the stock’s Quantitative Grade) because even a slight change could send DRI into hold territory.
Recommendation: B-rated Buy
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