A 3% Rally For This Restaurant Stock Could Earn You an 18% Gain (DRI)

The metrics are right for DRI stock to move ahead for investors

By , Street Authority


In June 2014, I made a very successful bearish bet that Olive Garden’s parent company (a restaurant conglomerate) would falter under the weight of its aging brands and mounting competition.

While the initial trade worked well, things are much different 27 months later.

My idea for returning to this trade (albeit on the other side) came to me when a commercial pilot friend of mine (and fantastic chef) asked me to join him at Olive Garden a few weeks back.

I thought, “OK, this guy flies a Boeing 777, dines around the world weekly and wants to eat at Olive Garden?” I’m no restaurant snob, but the last time I frequented Olive Garden was the early ’90s when I was in school and could only afford the never-ending pasta bowl.

But I humored him.

To my surprise, not only was the food tasty, but the décor, menu, wine list and even wait staff were all unusually polished — and the place was packed! For a chain that’s been around since 1982 (and was struggling just a few short years ago), Olive Garden has come a long way.

After that experience, my curiosity about the company got the best of me. So, like I always do, I began researching…

How This Well-Known Restaurant Chain Survived The Slaughter

Darden Restaurants, Inc. (DRI), which was spun off from General Mills, Inc. (GIS) in 1995, is a full-service restaurant company that owns and operates seven very popular dining brands: Olive Garden, Longhorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House.

The company now operates more than 1,500 wholly owned locations across the United States, employing 150,000 people with more than $6.8 billion in annual sales.

Fiscal 2015 and 2016 were breakthrough years for the company as it grew its adjusted earnings at 54% and 33%, respectively. Darden is on track to deliver another 10.4% growth for 2017; an impressive feat when S&P 500 earnings have been falling for almost a year and a half.

But Darden’s current bullish situation comes after years of struggle that began with anemic growth in 2012 before turning extremely negative the following year.

In 2015, with pressure mounting for the company to take action, Darden sold its seafood chain, Red Lobster, for $2.1 billion.

By cutting that dying brand, the company was able to free up cash, debt and resources to focus on rebuilding its core revenue generators — Olive Garden ($3.8 billion in annual sales) and Longhorn Steakhouse ($1.6 billion in annual sales) — as well as its other, higher-end brands.

The company then turned its attention toward Olive Garden. While the chain offered affordable dining options, the restaurant was dated and failing to meet investors’ and consumers’ expectations. Longhorn and others were carrying their weight, but Olive Garden needed some serious work.

CEO Gene Lee’s plan was to “get back to basics,” focusing on the consumer and the food; giving people what they wanted at prices they wanted.

The company concentrated its energies on revamping menus, improving marketing and completely updating the 843 Olive Garden locations inside and out. The chain even launched a takeout initiative and added electronic ordering and pay option kiosks at the table.

By the end of 2015, the reconstruction was working. Margins and sales were improving across all of Darden’s brands, and the company began beating analyst estimates and raising its earnings expectations for future growth….

In short, 2016 ushered in a lean, mean and fresh company that had rid itself of one large, losing entity (Red Lobster) and turned around another (Olive Garden).

Darden’s other restaurants are still well positioned to cater to more affluent diners and businesspeople, both of whom tend to be less susceptible to consumer spending whims. Many of the restaurants are located in or near high-end malls and large urban centers.

To that end, every one of Darden’s restaurant segments experienced positive revenue growth in 2016, and the company sees continued strength in 2017 with 24 to 28 new restaurants set to open.

How We’ll Profit From A DRI Breakout

But there’s one reason, aside from the fundamental strength, that makes me like Darden right now.

In March 2015, for the first time in history, Americans spent more on dining out than they did on groceries. At the same time, more than 14,000 restaurant locations have shut their doors since 2014.

This means that Darden was flourishing while many chains were struggling. And now that there are fewer dining options, Darden has the potential to capture even more market share.

Despite this, expectations remain low among analysts. And as I recently shared with subscribers of my Profit Amplifier newsletter, my models are already showing a high probability of an earnings beat, despite being nearly two months away from the company’s next report.

Even without earnings as a catalyst, the charts are leading the way with a bullish formation suggesting shares could break out soon.

It’s for all of these reasons that my Profit Amplifier readers and I bought call options on DRI that expire in January. I won’t get into specifics about the trade or how our strategy works (for more on that go here) — but suffice it to say, a small 3.2% move back to the stock’s recent highs near $63.70 will be enough for us to net a 17.6% profit.

Getting a large profit from such a small price movement is one of the many exciting things about using our simple options strategy. It reduces risk and preserves capital — all the while amplifying our gains in the process.

If you’d like to learn more about options and how we use them in Profit Amplifier, simply follow this link.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/11/a-3-percent-rally-for-this-restaurant-stock-could-earn-you-18-percent/.

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