On Dec 19, Zacks Investment Research upgraded Darden Restaurants, Inc. (DRI) to a Zacks Rank #1 (Strong Buy). The restaurateur has been witnessing rising earnings estimates ever since it reported strong fiscal second-quarter results on Dec 16. Further, shares of Darden rose nearly 3% since the earnings report.
Why the Upgrade?
Darden’s fiscal second-quarter 2015 earnings from continuing operations of 28 cents beat the Zacks Consensus Estimate of 27 cents by a penny and increased significantly year over year owing to improvement in revenues and margins. Also, earnings came at the higher end of the company's expected range of 26 to 28 cents.
Total revenue of $1.56 billion increased 5% year over year attributable to revenues from 53 new restaurants and comps growth at all its segments. Revenues also beat the Zacks Consensus Estimate of $1.55 billion by 0.5%
Darden completed the sale of its Red Lobster segment to Golden Gate Capital for $2.1 billion in cash in Jul 2014. The company now operates Olive Garden, LongHorn Steakhouse and The Specialty Restaurant Group. In our view, the company is scripting a turnaround as sales at almost all these units improved year over year, mainly due to menu innovation.
At LongHorn Steakhouse, sales were up 8% to $346 million. As many as 27 net new restaurants and positive comps contributed to the upside. Comps at LongHorn Steakhouse increased 2.6% attributable to check growth which reflects introduction of a new menu and the launch of Bold Bites in June. Bold Bites are smaller, individually portioned appetizers designed to satisfy guests who seek more portion and flavor.
Sales at Olive Garden were up 1.4% year over year to $882.0 million in fiscal second-quarter 2015 due to improvement in comps and revenues generated from 10 net new restaurants. Comps at Olive Garden were up 0.5%, better than the prior-quarter decline of 1.3% and the year-ago decline of 0.6%.
This marked the first positive quarter for the brand since the quarter ended May 2013. In order to revive traffic growth and support margin expansion, the company is working on its Olive Garden Brand Renaissance plan that has helped in improving comps.
Sales at The Specialty Restaurant Group increased 13% to $329 million, thanks to comps growth and restaurant openings. The segment posted positive comps growth for the third consecutive quarter. Comps were up 3.2% better than the prior-quarter comps growth of 2.1%. Comps grew 5% at The Capital Grille, 4.9% at Eddie, 3.7% at Yard House, 1.2% at Seasons 52 and 4.9% at Eddie V’s, partially offset by comps decline of 0.6% at Bahama Breeze.
Following better-than-expected second-quarter fiscal 2015 results, the company increased the lower end of its earnings per share guidance for fiscal 2015. Earnings are expected in the range of $2.25 to $2.30 as against $2.22 to $2.30 expected earlier. Owing to its cost saving initiatives, the company expects general and administrative ratio to be lower than 5% in fiscal 2015.
Such favorable earnings resulted in upward estimate revisions in the past 7 days, and prompted us to upgrade it to a Zacks Rank #1.
Other Stocks to Consider
The following companies with a favorable Zacks Rank that are worth considering include DineEquity, Inc. (DIN), BJ's Restaurants, Inc. (BJRI) and Domino's Pizza, Inc. (DPZ). While DineEquity and BJ's Restaurants sport the same Zacks Rank as Darden, Domino's Pizza has a Zacks Rank #2 (Buy).
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