Darden Restaurants Inc (NYSE: DRI), the restaurant operator that owns Olive Garden, LongHorn Steakhouse, and Capitale Grille, released impressive quarterly results on March 20 signifying a strong turnaround for the once struggling group.
Darden has had an eventful year. Activist hedge fund Starboard Value LP won the battle to take over Darden’s board in October. Starboard won the shareholder vote to replace the board by criticizing the restaurant group with a list of complaints, from wasting money on unlimited breadsticks to the Olive Garden’s reluctance to salt the pasta water to avoid eroding the pots. Prior to the Starboard takeover, Darden hastily sold the Red Lobster chain, much to the chagrin of Starboard who believed the sale was undervalued.
Highlights from Darden’s third quarter report include a nearly 7% increase year-over-year in sales, now totaling $1.73 billion. The restaurant operator posted diluted earnings per share of $0.99, easily beating estimates of $0.84 and signifying an impressive 39% increase from the same quarter last year. Same-store sales increased across the board, averaging 3.6% per franchise. Looking forward, Darden provided guidance for the fourth quarter of earnings per diluted share between $0.91 to $0.94, slightly higher than the analyst consensus of $0.89. Following the impressive report, Darden shares hit a new 52-week high of $70 on Friday morning.
CEO Gene Lee commented, “Our strategy of getting back to basics and elevating the food, service, and atmosphere in our restaurants in order to deliver the best possible guest experience is driving these sales and profitability improvements.” Lee was unanimously voted in as CEO in February after Starboard took over the board. Lee has over 30 years of restaurant experience and has been with Darden since 2007. Wall Street also notes that Darden’s strong performance was driven in part by an improved economy and lower gas prices, which has left more money in consumers’ pockets.
Darden is also exploring options to create value from real estate. The restaurant operator plans to sell its headquarters in Orlando valued at $152 million and is reportedly looking into turnings its restaurant properties into REITs.
On March 22, analyst Brian Bittner of Oppenheimer reiterated an Outperform rating on Darden and raised his price target from $70 to $75. Bittner is pleased with Darden’s improving margins, upside to earnings, and the “under-promise, over-deliver” mentality of its new leadership. Management raised earnings per share guidance due to “near-term operating performance” and “comps trends are solid across the portfolio.” Bittner continued, “Demand for real estate properties is coming in better than expected” and management is “committed to real estate monetization.”
Brian Bittner has rated Darden 15 times since February 2013, earning an 86% success rate recommending the restaurant franchise and a 9.7% average return per recommendation. Overall, Bittner has an 86% success rate recommending stocks with a +25% average return per recommendation.
Separately on March 23, analyst Joseph T. Buckley reiterated an Underperform rating on Darden and raised his price target to $55 from $47. Buckley noted that Darden’s 3Q earnings and same-store sales were better than expected, however “OG same store sales were up only 2.2% with negative traffic each month of the quarter and versus a down 5.4% performance a year ago.”
Joseph Buckley has given Darden one Hold rating and three Sell ratings since July 2014 as the stock slowly rose, earning him a -24.1% average loss per recommendation. Buckley has a 56% success rate recommending stocks with a +2.2% average return per recommendation.
Also on March 23, analyst Jason West of Credit Suisse reiterated a Neutral rating on Darden and raised his price target from $62 to $69. West noted “Solid EPS and guidance” from the 3Q report driven by lower expenses. He continued, “Even though the core Olive Garden brand remains sluggish, the balance of the DRI story is moving in the right direction. The company announced initial progress on real estate monetization, a significant cost cutting program and posted healthy SSS across the remaining brands.” West’s rating follows a “share price appreciation” and the improved cost outlook is due to “upgrade forecasts and valuation.”
Jason West has given Darden a Hold rating 4 times since December 2013. Overall, West has a 70% success rate recommending stocks with a +17.8% average return per recommendation.
On average, the top analyst consensus for Darden on TipRanks is Moderate Buy.
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