Darden Restaurants, Inc. (NYSE:DRI) posted better-than-expected quarterly earnings and lifted its forecast, sending DRI stock up sharply in early action.
Whether this makes shares in the operator of the Olive Garden restaurant chain a buy at current levels is another matter entirely.
Make no mistake, DRI is a far more attractive stock since having rid itself of the Red Lobster seafood chain. The divorce not only freed DRI from an operational drag, it allowed the company to pay down debt and buy back stock.
At the same time, DRI made Olive Garden more efficient and scored some hits with marketing initiatives. The company’s other chains like LongHorn Steakhouse are likewise doing better.
The issue is that restaurant stocks broadly have been trading sideways for more than a year, hurt in part by higher prices for food away from home and lower prices at the grocery store. Just look at the Dow Jones U.S. Restaurants & Bars Index (INDEXDJX:DJUSRU), which is essentially unchanged over the last 52 weeks.
That’s to say, as decent as DRI’s latest results and outlook may be, it’s not like the market has been fountain of upbeat sentiment and premium valuations for restaurant stocks.
A Blasé Case for DRI Stock
Aside from issues of valuation, DRI did have a fine quarter. Darden net earnings rose to $110.2 million, or 87 cents a share, vs. earnings of $86.4 million, or 67 cents a share in the same quarter last year. On an adjusted basis, which is what analysts care about, earrings were 88 cents a share. Analysts, on average, were looking for earnings of 82 cents a share, according to a survey by Thomson Reuters.
Sales rose to $1.71 billion from $1.69 billion a year ago, which was just shy of Wall Street’s estimate. All-important same-store sales gained 1.3%, just shy of analysts’ forecast for 1.5% growth. Darden affirmed its outlook for same-store sales growth of 1% to 2% this year.
Most importantly, the earnings beat allowed DRI to lift its earnings per share outlook to a range of $3.87 to $3.97 a share in for the current fiscal year. That’s up from a prior outlook of $3.80 to $3.90 a share and compares favorably with the Street estimate of $3.86.
As favorable as these results look in many ways, they’re not as bullish as they appear at first blush. After all, sales and same-store sales failed to exceed estimates. Even more important, the hike to Darden’s full-year earnings outlook mostly just reflects the better-than-expect EPS of the quarter just closed. It doesn’t imply additional Street-beating EPS going forward.
And all this transpires against a stock that doesn’t look particularly underpriced. On a forward earnings basis, DRI stock trades essentially in line with its own five-year average, according to data from Thomson Reuters.
If the growth prospects are indeed improved, you’d expect the market to be willing to pay at least something of a premium. So far, however, it’s still wait and see.
True, the outlook for Darden stock hasn’t been this favorable in years, but that’s not saying all that much. A sluggish industry backdrop, lack of investor enthusiasm for the restaurant subsector and a less-than-inspiring valuation make DRI look less than compelling.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
