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Darden (DRI) Strategic Efforts Bode Well: Should You Hold?

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Darden Restaurants, Inc. (DRI - Free Report) is likely to benefit from menu simplifications, off-premise offerings and digitization initiatives. Also, increased focus on online ordering bodes well. However, dismal same-restaurant sales across Olive Garden, Fine Dining and Other Business are persistent concerns.

Let us discuss the factors that highlight why investors should hold on to the stock for the time being.

Factors Driving Growth

Darden strives to attract guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, allowing menu customizations and making smarter promotional investments. The operational readjustments are likely to drive the company’s performance, going forward.

Even though capacity restrictions continue to ease, off-premise sales were strong during fourth-quarter fiscal 2021, thereby contributing 33% (of total sales at Olive Garden), 19% (LongHorn) and 16% (Cheddar's Scratch Kitchen). Notably, the company has been benefitting from technological enhancements with reference to online ordering, introduction of To Go capacity management and Curbside I'm Here notification. Further, the company intends to revamp its point-of-sale system to boost guest experience as well as to manage off-premise offerings.

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 increased significantly. During fiscal fourth quarter, 64% of Olive Garden's To Go orders were placed online, while 14% of Darden's total sales comprised digital transactions. Going forward, the improvements in business model are likely to reinforce its ability to boost restaurant value across its brands.

Maintaining liquidity during the pandemic is a herculean task during the pandemic. Darden stated that it has enough liquidity to survive the coronavirus pandemic for some time. As of May 30, 2021, the company’s cash balance totaled nearly $1,214.7 million compared with $994 million as of Feb 28, 2021. Lately, it has been generating positive cash flow, adding to the positives. As of May 30, 2021, the company’s long-term debt stands at $929.8 million compared with $929.7 million at the end of Feb 28, 2021. For fiscal fourth quarter, the company’s “times interest earned” ratio came in at 10.1, improving from negative 4.1 reported at the preceding quarter end.


Zacks Investment ResearchImage Source: Zacks Investment Research

In the past three months, shares of Darden have inched up 0.2% compared with the industry’s 4% growth. The dismal performance can be primarily attributed to the coronavirus pandemic. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the pandemic. We believe that the coronavirus pandemic will continue to hurt traffic and sales in the near future as well.

Also, decline in same-restaurant sales remain a concern. In fiscal 2021, same-restaurant sales at Olive Garden, Fine Dining and Other Business fell 9.9%, 19.2%, and 13.5%, year over year, respectively. Moreover, the company’s total sales fell 7.8% from the prior-year levels due to negative blended same-restaurant sales of 7.8%.

Zacks Rank & Key Picks

Darden currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Chuy's Holdings, Inc. (CHUY - Free Report) , Dine Brands Global, Inc. (DIN - Free Report) and Texas Roadhouse, Inc. (TXRH - Free Report) , each sporting a Zacks Rank #1.

Chuy's Holdings has a trailing four-quarter earnings surprise of 127.6%, on average.

Dine Brands’ 2021 earnings are expected to surge 269.3%.

Texas Roadhouse has a three-five year earnings per share growth rate of 10%.

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