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Street Analysts Mixed After Darden Restaurants Serves Up Lukewarm Results

Street Analysts Mixed After Darden Restaurants Serves Up Lukewarm Results

Olive Garden's parent company Darden Restaurants, Inc. (NYSE: DRI) reported fiscal first-quarter results which came in mixed versus expectations while some metrics flat out disappointed.

Here is a summary of how some of the Street's top analysts reacted to the print and management's outlook.

The Main Dish

Darden reported "solid" overall results but breaking down the performance by segment were more mixed, Stephens analyst Will Slabaugh wrote in a note. Specifically, earnings came in ahead of estimates for the 18th consecutive quarter on lower G&A and labor.

By segment, Olive Garden showed its 20th consecutive quarter of positive same-store sales growth while LongHorn's same-store sales growth of 2.6% was strong.

On the other side of the story, Cheddar's same-store sales fell 5.4% which was worse than the 1.6% decline the Street expected. The analyst wrote there are now concerns performance has worsened as comps came in negative for the ninth consecutive quarter.

UBS analyst Dennis Geiger also said overall results were "solid." The four key takeaways include: LongHorn digital sales rose around 50% while takeout orders grew 12%, "sluggish" performance at Cheddar's is due to reduced marketing spend and industry softness but traffic can rebound from "awareness-focused" advertising, loyalty tests at 7% of units are showing positive results and the timing of Thanksgiving could generate an 80 to 100 basis point tailwind to fiscal second quarter results.

Sticking To Winning Recipe

Darden's secret recipe on how to manage the business remained unchanged in the report quarter, Piper Jaffray analyst Nicole Miller Regan wrote in a note. The company's strategy of leveraging its human capital-focused management team with simple operations at the store-level continues to generate favorable guest scores.

Ongoing innovation and new sources of revenue also generated positive results in the quarter as off-premise sales rose 12% year-over-year to 14% of sales at Olive Garden, the analyst wrote.

"A continued commitment to leverage the organization's scale and drive value at the brand-level remain significant advantages for Darden," the analyst wrote.

Heading into Darden's print the stock's multiple was trading at a premium to its peers and nothing has changed to alter the thesis, KeyBanc Capital Markets analyst Eric Gonzalez wrote in a note.

The valuation is justified as Olive Garden and LongHorn are "sustainable growth stories" and Cheddar's outlook remains favorable.

Darden's stock is trading at 18 times 2020 estimated EPS which is a premium to the peer average of 17.5 times but warranted given its scale, management team, same-store sales growth consistency, among other factors.

Related Link: The Street Debates Darden's Earnings: Low Bar Set For Guidance?

Planning The Next Meal

Darden's management kept its fiscal 2020 guidance unchanged, including expectations for comps to grow 1% to 2% and EPS to be $6.30-$6.45, BTIG analyst Peter Saleh wrote in a note. Comps should benefit 80 to 100 basis points from the timing of Thanksgiving but the impact from Hurricane Dorian should erase 20 to 30 basis points of those gains.

"We still view Darden favorably given the strength of its core concepts, balance of sales drivers and highly enviable margin performance," Saleh wrote. "These factors should continue to drive shares higher despite the elevated industry headwinds."

Darden's report showed continued strength at large brands but smaller brands disappointed, Raymond James analyst Brian Vaccaro wrote in a note.

Even though Olive Garden and LongHorn combine for 72% of total sales the weakness at smaller brands makes the case for outperformance versus management's guidance more difficult.

Finally, Darden's management estimated food cost inflation to be 1% to 2% in fiscal 2020 and labor inflation to be 3.5% to 4.5%, SunTrust Robinson Humphrey analyst Jake Bartlett wrote in a note. These figures look "manageable" due to the company's productivity improvements.

Related Link: Bon Appétit: The Street Has Mostly Bullish Reaction To Darden's Q3

Ratings And Price Targets

  • Stephens maintains at Equal-Weight, unchanged $125 price target.
  • UBS maintains at Buy, unchanged $133 price target.
  • Piper Jaffray maintains at Overweight, price target lifted from $125 to $128.
  • KeyBanc maintains at Overweight, unchanged $140 price target.
  • Raymond James maintains at Market Perform.
  • BTIG maintains at Buy, unchanged $134 price target.
  • SunTrust maintains at Buy, price target lifted from $141 to $139.

Price Action

Shares of Darden Restaurants closed Friday at $119.80.

Latest Ratings for DRI

Jun 2021Truist SecuritiesMaintainsBuy
Jun 2021BarclaysMaintainsOverweight
May 2021Cowen & Co.UpgradesMarket PerformOutperform

View More Analyst Ratings for DRI
View the Latest Analyst Ratings


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