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Here's Why Investors Should Hold on to Darden (DRI) Stock Now

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Darden Restaurants, Inc.’s (DRI - Free Report) sales-building initiatives, technology-driven moves and robust performance of Olive Garden brand bode well. However, stiff competition, rising costs and lower-than-expected top line remains a concern. Consequently, shares of the company have gained 10.7% in the past year, compared with the industry’s rally of 21.8%. Let’s delve deeper.

Growth Drivers

Robust performance of Olive Garden brand continues to drive performance. In second-quarter fiscal 2020, Olive Garden's off-premise business improved 17% and accounted for 17% of total sales. Moreover, second-quarter fiscal 2020 marked Olive Garden’s 21st consecutive quarter of positive comps. Meanwhile, the company is also focusing on technology-driven initiatives like the system-wide rollout of tablets in order to capitalize on the digitization, which has rapidly penetrated the U.S. fast-casual restaurant sector. This initiative has been providing a boost to the company’s sales for the past few quarters.

Moreover, the company strives to attract guests at LongHorn by focusing on core menu, culinary innovation and providing regional flavors. Further, the company continues to focus on strengthening its in-restaurant execution through investments in quality and simplification of operations in order to augment guest experience. Courtesy of these efforts, segmental comps registered growth for 27 consecutive quarters. Moreover, LongHorn has outpaced the industry.

The company is trying to significantly cut operating costs by focusing on an aggressive cost management plan. Last year, cost savings had resulted in synergies of about $10 million.

The aforementioned efforts have been driving the bottom line. Notably, the company’s earnings met/surpassed the Zacks Consensus Estimate for 21 straight quarters. In second-quarter fiscal 2020, adjusted earnings came in at $1.12 per share, which outpaced the Zacks Consensus Estimate of $1.07. The bottom line also improved 21.7% year over year. The company’s relentless efforts to augment the basic operating factors of the business — food, service and ambiance drove the bottom line. In fiscal 2020, Darden’s earnings per share are anticipated at $6.30-$6.45.



Concerns

The company’s lower-than-expected top-line performance remains a concern. Revenues have missed estimates in four of the trailing five quarters. In second-quarter fiscal 2020, total sales of $2,056.4 million lagged the consensus mark of $2,058 million.

Moreover, increase in operating costs remains a concern. Total operating costs and expenses increased 4.8% year over year in fiscal 2019. Moreover, in the fiscal second quarter, total operating costs and expenses improved 3.9% year over year, following a rise of 3.2% in the preceding quarter. The upside can be attributed to an overall increase in food and beverage costs, restaurant expenses, and labor costs. Increase in expenses might hurt the company’s margin in the coming quarters.

Zacks Rank & Key Picks

Darden currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Chuy's Holdings, Inc. (CHUY - Free Report) , Bloomin' Brands, Inc. (BLMN - Free Report) and Dunkin' Brands Group, Inc. (DNKN - Free Report) . While Chuy’s sports a Zacks Rank #1 (Strong Buy), Bloomin and Dunkin each carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

Chuy’s, Bloomin and Dunkin have an impressive long-term earnings growth rate of 17.5%, 9.8% and 10.9%, respectively.

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