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Darden (DRI) Banks on Off-Premise Business Amid High Costs

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Shares of Darden Restaurants, Inc. (DRI - Free Report) have inched up 0.5% in the past three months against the industry’s 2% decline. The company gains from its off-premise business model and menu simplifications. This along with a focus on technological enhancements bodes well. However, a decline in traffic from pre-pandemic levels and a rise in food and labor costs are a concern.

Let’s discuss the factors highlighting why investors should retain the stock for the time being.

Factors Driving Growth

Even though capacity restrictions continue to ease, off-premise sales remained strong during third-quarter fiscal 2022. In third-quarter fiscal 2022, off-premise sales contributed 30% to total sales at Olive Garden and 16% at LongHorn. The company has been benefitting from technological enhancements related to online ordering, the introduction of To Go capacity management and Curbside I'm Here notification. Given the solid feedback about better customer experience and reduced friction, the company anticipates off-premise sales to remain high for some time. The company intends to revamp its point-of-sale system to boost guest experience and manage off-premise offerings.

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To reduce friction and enhance consumers’ convenience in the digital platform, Darden initiated streamlining the order pickup process and payment methods. Backed by these initiatives, online ordering increased sharply. It is also witnessing a sharp increase in To Go sales. During third-quarter fiscal 2022, 63% of all off-premise sales were placed digitally. Going forward, the improvements in the business model are likely to reinforce its ability to boost restaurant value across its brands.

Darden strives to attract guests by focusing on the core menu, culinary innovation and providing regional flavors. It is also working to simplify kitchen systems, improve staffing levels and operational excellence to enhance the guest experience, enable menu customizations and make smarter promotional investments. The operational readjustments are likely to drive the company’s performance going forward.

Maintaining liquidity has become an arduous task during the coronavirus crisis. As of Feb 27, 2022, Darden’s cash and cash equivalents came in at $555.3 million compared with $746.3 million as of Nov 28, 2021. Although the cash balances have declined sequentially, the company believes that it has enough liquidity to support operations for some time. The company stated the availability of $1 billion net borrowings available under the revolving credit facility. Lately, it is generating positive cash flow, which adds to the positives. As of Feb 27, 2022, long-term debt was $916.4 million compared with $929 million as of Nov 28, 2021. The times-interest-earned ratio at the end of the fiscal third quarter came in at 17.1x compared with 15.4x in the previous quarter. This indicates that the company is better positioned to meet debt obligations.

Concerns

The coronavirus crisis has rattled the Retail - Restaurants industry and Darden is not immune to the aftereffects. During the fiscal third quarter, the company’s operations were negatively impacted by a spike in the Omicron cases, thereby leading to increased staffing shortages and reduced demand. Due to this, the company witnessed a sales slowdown of more than $100 million. Although most dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.

In the fiscal third quarter, total operating costs and expenses increased 35.5% year over year to $2,147.9 million. This escalation was primarily due to a rise in food and beverage costs, restaurant expenses and labor costs. For fiscal 2022, the company expects total inflation of 6% (up from the prior projection of 5.5%); commodities inflation of 9% (significantly up from 7-8% estimated earlier) and total restaurant labor inflation of 6-6.5%, which includes hourly wage inflation of 9% (in line with previous estimates).

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 are BBQ Holdings, Inc. (BBQ - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Dave & Buster's Entertainment, Inc. (PLAY - Free Report) .

BBQ Holdings sports a Zacks Rank #1. BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have increased 7.5% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and earnings per share (EPS) suggests growth of 40.9% and 66.2%, respectively, from the year-ago period’s levels.

Arcos Dorados sports a Zacks Rank #1. Arcos Dorados has a long-term earnings growth of 31.3%. Shares of the company have risen 47.7% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 10.3% and 66.7%, respectively, from the year-ago period’s levels.

Dave & Buster's sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 212%, on average. Shares of the company have increased 6.2% in the past year.

The Zacks Consensus Estimate for Dave & Buster's current-year sales and EPS suggests growth of 24.4% and 49.3%, respectively, from the year-ago period’s levels.