Fresh off a shakeup that restructured the company’s board and upper management, Darden Restaurants, Inc. (DRI) has a lot to prove when it steps up to release its second-quarter earnings report tomorrow. In addition to 12 new Starboard Value LP-backed board members, DRI has also rid itself of its underperforming Red Lobster chain, opening the door for a potential turnaround in sales.
But will the changes be enough to push Darden stock to fresh all-time highs?
Diving into the numbers, Darden is expected to post a profit of 27 cents per share for the quarter — an 80% increase over the same quarter last year. However, sales are expected to fall by 24% to $1.55 billion. The discrepancy is at the core of the recent management shakeup, with food expenses and management expenses growing considerably over the past few years. Guidance will be the key here, as investors look for a turnaround following the Starboard coup.
What little optimism there is among the brokerage community can be found within Darden’s whisper number for the quarter. Currently, EarningsWhisper.com reports a whisper number of 28 cents per share of Darden stock, a penny better than the consensus.
The rest of the analyst community is in wait-and-see mode, with Thomson/First Call reporting nine “buys,” 17 “holds” and two “sell” ratings. Furthermore, the 12-month price target of $52 for Darden stock represents a discount to Friday’s close at $57.38. Naturally, upgrades or price-target increases following positive guidance could be a boon for DRI.
The options pits is where the real optimism is, however. Currently, the December/January put/call open interest ratio for Darden stock rests at 0.98, with calls and puts in near parity for the front two months of options. This ratio plunges considerably when we zero in on the December series (which expires at the end of this week), coming in at 0.5 as calls double puts among options most affected by tomorrow’s quarterly report.
Click to Enlarge Overall, December option implieds are pricing in a modest potential post-earnings move of about 4.5% for DRI. This places the upper bound at $60.10, while the lower bound lies at $54.90. As noted above, a breakout to the upside would once again push Darden stock into 52-week high territory, while a plunge would have the stock testing support at $55 and potentially its 50-day moving average if follow through selling becomes an issue.
Darden has a lot riding on guidance heading into tomorrow’s quarterly report, but that is why the shareholders elected the new board and cleaned house in upper management.
If the plans come to fruition, the stock could see a short-term bump before settling into a more reasonable uptrend.
2 Options Trades on Darden Stock
Bull Call Spreads: Those traders looking to side with the options bulls might want to consider a Jan $57.50/$60 bull call spread. At last check, this spread was offered at $1.00, or $100 per pair of contracts. Breakeven lies at $58.50, while a maximum profit of $1.50, or $150 per pair of contracts, is possible if Darden stock closes at or above $60 when January options expire.
Selling Puts: If following the bullish crowd isn’t your thing, then you might also consider betting on technical support and selling option premium ahead tomorrow’s report. Currently, the December $52.50 put sell stands an excellent chance of finishing out of the money. As of the close on Friday, this option was bid at 12 cents, or $12 per contract. In this trade you keep the premium as long as DRI closes above $52.50 when December options expire at the end of the week. On the downside, if Darden stock trades below $52.50 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $52.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
