Darden Restaurants, Inc. (DRI - Free Report) is currently one of the best-performing stocks in the U.S. restaurant space and has the potential to carry on the momentum in the near term as well. Therefore, if you haven’t taken advantage of the share price appreciation yet, it’s time you add this Zacks Rank #2 (Buy) stock to your portfolio.
Shares of Darden have outperformed its industry in the past six months. The stock has rallied 8.3% compared with the industry’s growth of 2.2%.
Let’s have a look at a few factors in detail that make Darden a profitable investment at the moment.
Sales Building Initiatives — Top-Line Driver
Darden’s riveting growth potential lies in its strategies to build a robust top line. By focusing on technology-driven initiatives like the system-wide rollout of tablets, the company has been boosting sales since the past few quarters. Sales of the company have also picked up momentum since the launch of mobile ordering in 2014.
Apart from technological innovations, Darden implemented a set of initiatives under its Brand Renaissance Plan to boost the performance of the Olive Garden brand. These include simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, developing new core menu items, allowing customization and making smarter promotional investments. Also, the brand is focusing on remodeling and bar refreshes. The revamped restaurants are already generating high same-restaurant sales and returns. In fact, the remodeling program gained momentum in the last couple of quarters and the company intends to continue investing in remodeling for optimal returns. In fact, supported by these initiatives, Olive Garden posted the 14th consecutive quarter of positive comps in third-quarter fiscal 2018.
Moreover, the Zacks Consensus Estimate for fiscal 2018 sales is pegged at $8.1 billion, reflecting an increase of 12.6% from 2017. Darden’s relentless efforts to drive sales should put the company on growth trajectory, going forward.
Cost Saving Efforts to Reap Benefits
Darden is focusing on an aggressive cost management plan, under which it trying to significantly cut operating costs. In fact, for fiscal 2018, the company expects 10-40 basis points year-over-year margin expansion as a result of cost savings. Moreover, the company plans to reinvest any incremental savings into pricing and long-term growth drivers for the business, particularly emphasizing on enhancing its quality to drive market share gains.
We believe that such initiatives will immensely help the company witness earnings growth. Arguably, earnings growth is of the utmost importance for determining a stock’s potential, as surging profit levels often indicate solid prospects (and stock price gains). In 2018, Darden’s earnings per share are expected to grow 18.7%.
Valuation Looks Strong
Looking at Darden’s Price to Earnings Ratio (P/E) for the current fiscal, investors might be willing to add the stock their portfolio, as the company is undervalued compared to its peers. The company’s P/E ratio for the trailing 12 months stands at 18.9 while that of the industry’s is 24.5x.
Moreover, per VGM Score that identifies the most attractive value, growth and momentum characteristics, Darden has a Score of A, indicating that the stock is most likely to outperform.
Positive Synergies From Cheddar’s Acquisition
Darden’s acquisition of a small restaurant chain, Cheddar's Scratch Kitchen (Cheddar's), in April 2017, added an undisputed casual dining value to the company’s portfolio of differentiated brands. It also helped Darden further enhance its scale. In the fiscal third quarter, total sales were favored 11.3% from the addition of 154 Cheddar’s and 34 other new restaurants. Segmental sales also improved owing to Cheddar’s integration in the Other Business segment, which jumped 71.4% year over year to $438 million in the last reported quarter.
Further, management expects to realize synergies in the range of $22-$27 million by the end of fiscal 2019. Over the current fiscal, Darden plans to make significant non-guest facing changes, which are expected to have an impact on restaurant level execution. The company reported that it is currently integrating the two largest, recently acquired Cheddar’s franchisees. The integration is expected to help the brand take advantage of the scale, synergies and other benefits of Darden’s infrastructure. Moving forward, Darden expects Cheddar to bring incredible opportunity for long-term growth.
Darden delivered an ROE of 28.12% in the trailing 12 months compared with its industry’s 6.17%. This supports the company’s immense growth potential and indicates that it reinvests more efficiently compared with its peers.
Other Stocks to Consider
Other top-ranked stocks in the U.S. restaurant space include Wingstop (WING - Free Report) , Denny’s (DENN - Free Report) and Dine Brands (DIN - Free Report) . While Wingstop sports a Zacks Rank #1 (Strong Buy), Denny’s and Dine Brands carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Wingstop, Denny’s and Dine Brands’ earnings for 2018 are expected to increase 9.5%, 12.1% and 23.1%, respectively.
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