Darden Restaurants, Inc. (DRI Quick QuoteDRI - Free Report) is benefiting from its focus on opening restaurants, Ruth’s Chris acquisition and its diversified brand portfolio.

Shares of this casual dining restaurant operator have gained 2.5% in the past year against the Zacks Retail - Restaurants industry’s 2.7% decline. The uptrend is attributable to the company’s intent focus on enhancing and diversifying its product portfolio, along with leveraging and strengthening its competitive advantages.

The Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’s fiscal 2024 and 2025 earnings per share is pegged at $8.85 and $9.58, respectively, indicating 10.6% and 8.3% growth from the prior year’s reported levels. Furthermore, the earnings estimate for fourth-quarter fiscal 2024 suggests 1.6% growth from the year-ago reported figure. DRI delivered a trailing four-quarter earnings surprise of 3%, on average.

The growth prospect of this company is further solidified by a VGM Score of B, backed by a Growth Score of A. The positive trend signifies bullish analysts’ sentiments, robust fundamentals and the chances of an outperformance in the near term.

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However, the prospects of Darden are hindered by inflationary pressures, especially on commodities and softer same-restaurant guest counts.

What Makes the Stock Attractive?

Restaurant Openings Bode Well: One of Darden’s growth initiatives includes expansion through new restaurant openings. This initiative aids the company in fueling its growth prospects globally and boosting its top line.

During the third quarter of fiscal 2024, the company opened 53 net new restaurants taking the total number of company-owned restaurants to 2,022 units as of Feb 25, 2024. This number showcases 5.6% growth from the fiscal 2023 end and 7% year over year. Furthermore, the growth in net new restaurant openings contributed notably to the total sales increase in the first nine months of fiscal 2024. For fiscal 2024, the company expects to open 50-55 net new restaurants. For fiscal 2025, it expects new restaurant openings to be between 45 and 50.

Ruth’s Chris Buyout: On Jun 14, 2023, Darden acquired the Ruth's Hospitality Group by purchasing 100 percent equity interest for a total consideration of $724.6 million. The acquisition encompasses 77 company-owned locations, 74 franchisee-owned locations and four managed locations operating under contractual agreements.

This accretive buyout is faring well for the company as the addition of new restaurants is fostering the top line of Darden’s Fine Dining segment as well as its overall sales. The addition of 79 company-owned Ruth's Chris Steak House restaurants impressively helped in driving the total sales of Darden in the first nine months of fiscal 2024. It also contributed to the growth of the Fine Dining segment’s sales, which grew 58.3% year over year to $372.9 million during the third quarter of fiscal 2024.

Diversified Portfolio of Brands: Darden is gaining from its versatile portfolio of brands, which is aiding it to position well in the competitive market. Namely, Olive Garden, LongHorn Steakhouse, Yard House, Cheddar's Scratch Kitchen, Seasons 52, Ruth's Chris Steak House and Bahama Breeze have been at all-time highs for overall guest satisfaction for a few quarters now.

Prioritizing a return to fundamental principles has ensured consistent excellence in food, service and atmosphere, resulting in record-breaking levels of guest satisfaction metrics. The company's commitment to utilizing its competitive advantages strategically has been fruitful, as seen in the outstanding performance across its various brands.

Headwinds

High-Cost Inflation: Despite solid cost management, Darden is facing pressures in the form of higher labor costs and commodity inflation. The labor inflation is attributable to increased wages, which are expected to persistently keep profits under pressure.

In the fiscal third quarter, total operating costs and expenses increased 6.2% year over year to $2.6 billion. The upside was primarily due to increased food and beverage costs, restaurant expenses and labor costs. Moving ahead, the company is cautious about price increases in Produce and Beef. For fiscal 2024, it expects total inflation to be approximately 3% and commodities inflation to be about 1.5%.

Soft Same-Restaurant Guest Counts: The company’s top line is being affected by the softer trends in same-restaurant guest counts. During the third quarter of fiscal 2024, the sales of all the reportable segments of Darden were partially offset by a decline in same-restaurant guest counts.

Although the company is actively seeking opportunities to invest in several strategies to foster guest count, the market uncertainties and high-cost environment are shaking consumer confidence regarding discretionary spending.

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