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Here's Why You Should Retain Darden Restaurants (DRI) Stock Now
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Darden Restaurants, Inc. (DRI - Free Report) is likely to benefit from the strong off-premise business, LongHorn performance and menu innovation. Also, the focus on strategic acquisitions bodes well. However, a volatile macro environment and inflationary pressures 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 first-quarter fiscal 2024. During the quarter, off-premise sales contributed approximately 22% to total sales at Olive Garden and 13% at LongHorn. Notably, the company has benefited from technological enhancements concerning online ordering, the introduction of To Go capacity management and Curbside I'm Here notification. Given the solid feedback on account of enhanced customer experience and reduced friction, the company expects off-premise sales to remain elevated for some time. The company intends to revamp its point-of-sale system to boost guest experience and manage off-premise offerings.
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 more innovative promotional investments. The operational readjustments are likely to drive the company’s performance going forward.
During the fiscal first quarter, sales at Longhorn were up 10.8% year over year to $669.8 million. Same-restaurant sales and traffic growth primarily drove the upside. Comps in the segment rose 8.1% year over year compared with a 7.1% growth reported in the previous quarter. The impressive sales performance, labor productivity and increased pricing aided the segment’s margin performance. During the quarter, the segment’s profit margin increased 230 basis points year over year to 17.5%. Moving ahead, the company is optimistic with respect to the business-model improvements.
Emphasis on the acquisition of Ruth's Hospitality Group bodes well. The buyout will likely be accretive to Darden's net earnings per share in fiscal 2024 by nearly 10 to 12 cents, excluding acquisitions and integration-related expenses. Moreover, management made necessary operational readjustments to the brand, which are expected to reap long-term benefits. Apart from making solid progress with integrating Cheddar’s, DRI seems to have gained more confidence in its outcome. Moving ahead, the company intends to migrate Ruth's Chris under the Darden platform in a phased manner. It expects to complete the process over the next nine months.
Shares of Darden have gained 13.6% in the past year compared with the industry’s 8.8% growth.
Image Source: Zacks Investment Research
Concerns
The company is persistently shouldering higher expenses, which have been detrimental to margins. In the first quarter fiscal 2024, total operating costs and expenses increased 12.5% year over year to $2,477.7 million. The escalation was primarily due to increased food and beverage costs, restaurant expenses and labor costs. Moving ahead, the company remains cautious of price increases in Beef, Produce and wheat. For fiscal 2024, the company expects total inflation of 3-4% and commodities inflation of 2.5%.
Zacks Rank & Key Picks
Darden currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests rises of 19.2% and 13%, respectively, from the year-ago period’s levels.
El Pollo Loco Holdings, Inc. (LOCO - Free Report) currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 23.7%, on average. Shares of LOCO have gained 2.7% in the past year.
The Zacks Consensus Estimate for LOCO’s 2024 sales and EPS indicates a 3.5% and an 18.3% growth, respectively, from the year-ago period’s levels.
Chipotle Mexican Grill, Inc. (CMG - Free Report) currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 4.8% on average. Shares of CMG have increased 24.1% in the past year.
The Zacks Consensus Estimate for CMG’s 2023 sales and EPS indicates 13.6% and 31.8% growth, respectively, from the year-ago period’s levels.
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Here's Why You Should Retain Darden Restaurants (DRI) Stock Now
Darden Restaurants, Inc. (DRI - Free Report) is likely to benefit from the strong off-premise business, LongHorn performance and menu innovation. Also, the focus on strategic acquisitions bodes well. However, a volatile macro environment and inflationary pressures 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 first-quarter fiscal 2024. During the quarter, off-premise sales contributed approximately 22% to total sales at Olive Garden and 13% at LongHorn. Notably, the company has benefited from technological enhancements concerning online ordering, the introduction of To Go capacity management and Curbside I'm Here notification. Given the solid feedback on account of enhanced customer experience and reduced friction, the company expects off-premise sales to remain elevated for some time. The company intends to revamp its point-of-sale system to boost guest experience and manage off-premise offerings.
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 more innovative promotional investments. The operational readjustments are likely to drive the company’s performance going forward.
During the fiscal first quarter, sales at Longhorn were up 10.8% year over year to $669.8 million. Same-restaurant sales and traffic growth primarily drove the upside. Comps in the segment rose 8.1% year over year compared with a 7.1% growth reported in the previous quarter. The impressive sales performance, labor productivity and increased pricing aided the segment’s margin performance. During the quarter, the segment’s profit margin increased 230 basis points year over year to 17.5%. Moving ahead, the company is optimistic with respect to the business-model improvements.
Emphasis on the acquisition of Ruth's Hospitality Group bodes well. The buyout will likely be accretive to Darden's net earnings per share in fiscal 2024 by nearly 10 to 12 cents, excluding acquisitions and integration-related expenses. Moreover, management made necessary operational readjustments to the brand, which are expected to reap long-term benefits. Apart from making solid progress with integrating Cheddar’s, DRI seems to have gained more confidence in its outcome. Moving ahead, the company intends to migrate Ruth's Chris under the Darden platform in a phased manner. It expects to complete the process over the next nine months.
Shares of Darden have gained 13.6% in the past year compared with the industry’s 8.8% growth.
Image Source: Zacks Investment Research
Concerns
The company is persistently shouldering higher expenses, which have been detrimental to margins. In the first quarter fiscal 2024, total operating costs and expenses increased 12.5% year over year to $2,477.7 million. The escalation was primarily due to increased food and beverage costs, restaurant expenses and labor costs. Moving ahead, the company remains cautious of price increases in Beef, Produce and wheat. For fiscal 2024, the company expects total inflation of 3-4% and commodities inflation of 2.5%.
Zacks Rank & Key Picks
Darden currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
Arcos Dorados Holdings Inc. (ARCO - Free Report) sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 35%, on average. The stock has gained 21.6% in the past year. You can see the complete list of today’s Zacks Rank #1 stocks here.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests rises of 19.2% and 13%, respectively, from the year-ago period’s levels.
El Pollo Loco Holdings, Inc. (LOCO - Free Report) currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 23.7%, on average. Shares of LOCO have gained 2.7% in the past year.
The Zacks Consensus Estimate for LOCO’s 2024 sales and EPS indicates a 3.5% and an 18.3% growth, respectively, from the year-ago period’s levels.
Chipotle Mexican Grill, Inc. (CMG - Free Report) currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 4.8% on average. Shares of CMG have increased 24.1% in the past year.
The Zacks Consensus Estimate for CMG’s 2023 sales and EPS indicates 13.6% and 31.8% growth, respectively, from the year-ago period’s levels.