Darden Restaurants (DRI) looks like an entirely different company — and DRI a totally different stock — ever since it came under the spell of an activist investor and sold the Red Lobster chain.
There are a number of moving parts to DRI’s recent success. Under the influence of hedge fund Starboard Value, the casual restaurant operator is reorganizing its segment structure, cutting costs and planning to split off a portion of its real estate holdings.
In another critical area of improvement, DRI has customers responding to its brands again.
DRI’s decision to focus on Olive Garden, LongHorn Steakhouse and Bahaman Breeze, among other nameplates, has the company in a groove for top-line gains. DRI sales have now grown for six straight quarters.
A Beat-And-Raise Quarter for DRI
In the most recent period, Darden said revenue grew 5.7% to $1.69 billion. Analysts were looking for sales of $1.68 billion, according to a survey by Thomson Reuters. Same-store restaurant sales — a key measure of a restaurant chain’s health — gained 3.4%.
Sales growth and cost controls helped Darden earnings come to $86.4 million, or 68 cents a share. That’s a deep dive from last year’s profit of $503.2 million, or $3.81 a share — but then, the year-ago quarter contained a gain on the sale of discontinued operations.
On an adjusted basis — which is all Wall Street and the market care about — Darden earnings came to 63 cents a share. Analysts were looking for adjusted earnings of just 58 cents a share.
And just to complete the daily double of a beat-and-raise quarter, DRI hiked its outlook. The market loves when that happens.
On an adjusted basis, full-year earnings are targeted at $3.15 to $3.30 a share, up from $3.05 to $3.20. DRI didn’t change its estimate for same-restaurant sales growth of 2% to 2.5%.
Now that Red Lobster in no longer in the picture, DRI is also seeing same-restaurant sales growth at all of its brands, which include Yard House, Eddie V’s, The Capital Grille and Seasons 52.
DRI is making progress both on both the customer-facing and operational side of things. As CEO Gene Lee said in a statement:
“We continue to make progress on our operating fundamentals of culinary innovation, attentive service and engaging atmospheres while continuing to focus on disciplined cost management.”
Bottom Line
DRI appears to have found a recipe for success in an industry that has never been more competitive, and the market is more than pleased.
Indeed, DRI stock has been a big outperformer in an otherwise dismal year for equities. DRI stock is up more than 17% year-to-date. Meanwhile, the S&P 500 is down nearly 6%.
Valuation remains reasonable as well. Even after putting up substantial gains this year, DRI stock trades at 19 times forward earnings. That’s not out of line considering the company’s projected earnings gains.
In a year where it’s hard to find ideas that are working, DRI stock looks good for more outperformance ahead.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
