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Darden (DRI) Stock Surges 45% in 6 Months: Crosses Industry Mark

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Shares of Darden Restaurants, Inc. (DRI - Free Report) have surged 44.8% in the past six months, compared with the industry’s rally of 14.3%. The company is benefiting from Cheddar’s business model transformation, robust earnings surprise history, sales building efforts and strong liquidity.

We are encouraged by Darden’s impressive earnings surprise. Notably, the company’s earnings surpassed the Zacks Consensus Estimate for 26 straight quarters. In third-quarter fiscal 2021, the company reported adjusted earnings per share of 98 cents per share, beating the Zacks Consensus Estimate of earnings of 72 cents. The company’s continuous efforts to augment the basic operating factors of the business — food, service and ambiance — bode well. The Zacks Rank #2 (Buy) company expects fourth-quarter fiscal 2021 earnings per share in the range of $1.60 to $1.70, which was well above the analyst’s expectations.

Moreover, an upward revision in earnings estimates for fiscal 2021 reflects analysts’ optimism regarding the company’s growth potential. In the past 30 days, the Zacks Consensus Estimate for its fiscal 2021 earnings has moved up 21.5% to $3.96 per share. The company also has an impressive long-term earnings growth rate of 10%. Let’s delve deeper and analyze if the stock can sustain the momentum in the near future.


Factors Driving Growth

Due to the transformation, the company is witnessing improved margin at Cheddar’s. Moving forward, the company considers Cheddar a significant prospect for long-term growth. It is also witnessing sharp increase in To Go sales. The company announced that across the Darden, its hourly labor productivity has improved by over 20%, with Cheddar’s increasing over 30%. Due to Cheddar’s business model transformation, Cheddar’s the restaurant level margins has improved over 300 basis points year-to-date through the third quarter. The company also added that when Cheddar’s reaches 100% of the pre-COVID sales, it anticipates that restaurant level margins to be well in the high teens.

At LongHorn, the company strives to attract its guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on its marketing strategy to improve execution, customer relationship management and digital advertising, and a strong promotional pipeline that leverasges the segment’s expertise. Further, the company continues to focus on strengthening its in-restaurant execution through investments in quality and simplification of operations in order to enhance the guest experience.

During fourth-quarter 2020, the company rolled out online ordering facility for Cheddar's as well as other brands that did not have this facility previously. This also included online sales of alcohol for all brands. To reduce friction and enhance consumer convenience in the digital platform, the company initiated streamlining of order pickup process and payment methods. Backed by these initiatives, online ordering has increased sharply.

Darden stated it has enough liquidity to survive the coronavirus pandemic for some time. As of Feb 28, 2021, the company’s cash balance totaled nearly $994 million, million compared with $777 million as of Nov 29, 2020. Lately, it has been generating positive cash flow, which is a positive. As of Feb 28, 2021, the company’s long-term debt stands at $929.7 million compared with $929.4 million at the end of Nov 29, 2020. At the end of third-quarter fiscal 2021, the company had total debt-to-capital ratio of 0.27 that indicates that its debt levels are manageable.

Other Key Picks

Some other top-ranked stocks in the same space include Jack in the Box Inc. (JACK - Free Report) , Chuy's Holdings, Inc. (CHUY - Free Report) and Starbucks Corporation (SBUX - Free Report) . All these stocks have the same rank as Darden. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Jack in the Box has three-five-year earnings per share growth rate of 17%.

Chuy's Holdings has a trailing four-quarter earnings surprise of 126.5%, on average.

Starbucks fiscal 2021 earnings are expected to rise 141.9%.

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Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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