We are reverting to a Neutral recommendation on Darden Restaurants Inc. (DRI) from Underperform owing to revival in same store sales in three of its struggling key brands – Red Lobster, Olive Garden and LongHorn Steakhouse in the fourth-quarter of 2013. However, some issues which might restrict margin growth keep us on the sidelines at the current level.
Why Back to Neutral?
Darden has undertaken a set of initiatives to trigger sales at three of its core brands. These include focusing on value-proposition and promotional offers, revealing affordable price certainties and introducing a new menu, all of which paid off in the fourth quarter of 2013. In fact, Darden remains poised to improve guest count and check growth through affordable pricing in 2014 owing to a soft consumer discretionary spending environment.
Another tailwind for the company is the emergence of its Specialty Restaurant Group (SRG) brand, which has grown steadily over the last couple of quarters. The Specialty Restaurant Group mainly caters to young, multicultural and high-income guests, which helps it to survive economic volatility. Further, two big ticket acquisitions in recent times — Eddie V's and Yard House – will also boost the brand.
Despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Darden delivered lower-than-expected earnings this season, probably due to steeper-than-expected price discounting. Earnings also declined on a year-over-year basis.
Several issues like the Affordable Care Act, higher food and beverage expenses expected in the first half of fiscal 2014 as well as increased incentive compensation are expected to limit margin. Darden currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Others players in the same industry, which look attractive at current levels include The Wendy’s Co. (WEN), Brinker International Inc. (EAT) and BJ's Restaurants Inc. (BJRI) all carrying a Zacks Rank #2 (Buy).
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