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Bull of the Day: Darden Restaurants, Inc., (DRI)

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Wall Street didn’t give up on the restaurant industry even though the pandemic devastated in-person dining throughout much of the U.S. for most of the past year, since what’s next always matters more. Darden Restaurants (DRI - Free Report) is a sit-down dining powerhouse that was hit far worse than the likes of Chipotle (CMG - Free Report) and others more custom to take-out.  

Nonetheless, Darden shares hit new highs in late March and a return to top-line growth appears just around the corner, boosted by the economic reopening, the vaccine, and pent-up demand.

In-Person Dining Struggles

Darden is a dine-in restaurant chain standout, with brands from Olive Garden and LongHorn Steakhouse to Yard House and The Capital Grille. The company’s portfolio includes over 1,800 restaurants and it is continuing to open new locations.

As everyone knows, many restaurants closed in-person dining temporarily and struggled after that given capacity restraints. Plus, some customers decided to cut back on spending, while others opted for take-out options.

Consequently, DRI’s sales tumbled during the trailing four quarters. Its largest drop came in Q4 FY20 (period ended May 2020), when revenue fell 43%. The dining environment has changed since the start of the pandemic and its revenue largely improved since then.

Economic Rebound & Vaccine Rollout

Darden’s revenue still fell 26% for the three-month period (Q3 FY21) ended in February, with its adjusted earnings down 50%. The recent performance, however, showed improvement and more importantly Darden’s outlook called for a return to growth. The company’s positive guidance helped the stock surge to new highs after its March 25 release that saw it beat our bottom-line estimate by 36%.

The economic reopening underway throughout much of the U.S. is set to boost Darden and countless other hard-hit businesses and sectors. Many states have already lifted tons of coronavirus-based restrictions as the vaccine rollout remains largely successful.

With more than 40% of all U.S. adults fully vaccinated and the daily number of new Covid-19 cases on the decline, many other big states with some of the largest cities in the country, from New York to Illinois are paving the way for a much more expansive economic reopening, as restriction after restriction is lifted. And some recent economic data validated the growth economists started projecting last year.

For instance, U.S. GDP jumped by a seasonally adjusted annual rate of 6.4% in the first quarter, to put the economy within 1% of its pre-pandemic levels, according to new Commerce Department data. The latest round of stimulus checks helped propel a 4.2% month-over-month pop in consumer spending, the biggest since last summer. Plus, U.S. GDP is projected to climb by roughly 6.5%, which would be the strongest in roughly 35 years.

What Else

DRI shares have soared 110% in the last year to destroy its industry’s 50% climb and its peer group’s 70%. This group features Domino's (DPZ - Free Report) , McDonald's (MCD - Free Report) , and other businesses more prepared for the pandemic-based environment. This run includes a 33% jump since mid-November, following the vaccine news.

Darden shares surged to records after its earnings release on March 25, and luckily, they have cooled down a bit. The stock closed regular hours Thursday at $141.51, or roughly 6% below its highs.

The recent pullback has DRI sitting below neutral RSI levels (50) at 45, which could give the stock room to run even though it has already climbed so far. It’s also a great sign that DRI trades at a 30% discount to it industry at 20.8X forward earnings despite its outperformance. This also represents a 12% discount to its own year-long median.

Zacks estimates call for a big comeback, with Darden’s fourth quarter revenue projected to soar 67% from the easy-to-compare period to $2.12 billion. This top-line expansion is projected to help it swing from an adjusted loss of -$1.24 a share to +$1.71 per share. Darden’s fiscal 2021 revenue is still expected to dip 9%, even though its adjusted earnings are projected to pop 27%.

The floodgates now appear open for a major boom at the sit-down chain, with its FY22 revenue projected to soar 30% to reach $9.12 billion. This would mark by far its largest growth as a public firm—went public in the mid-1990s—and see it climb well above its pre-pandemic levels of $8.5 billion. This excepted top-line expansion is projected to boost its adjusted FY22 earnings by 78% to $7.04 a share.

Bottom Line

Darden’s consensus earnings estimates climbed significantly since its last report to help it land a Zacks Rank #1 (Strong Buy). DRI has easily topped our bottom-line estimates in the trailing four periods, as part of a much longer string of beats.

The company is also part of an industry that’s in the top 40% of our over 250 Zacks industries, and 15 of the 22 brokerage recommendations Zacks has are either “Strong Buys” or “Buys,” with the remaining ratings at a “Hold.”

Plus, DRI raised its dividend last quarter and it authorized a new $500 million repurchase program. Given this backdrop, investors might want to consider Darden as a play on the economic reopening and beyond.

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