Darden Restaurants (DRI) recently delivered a strong “beat and raise”, driven by same-store sales growth across all eight of its brands and rapidly expanding profit margins. Management also increased its full year EPS guidance, prompting analysts to revise their estimates significantly higher too.
This move sent the stock to a Zacks Rank #1 (Strong Buy).
Darden Restaurants owns and operates more than 1,500 restaurants under eight brands, primarily in the United States. Its two largest brands are Olive Garden and LongHorn Steakhouse, which account for 86% of total restaurants. Darden sold the Red Lobster brand in 2014.
Starboard Value, an activist hedge fund, was able to win shareholder support to replace the entire board of directors last fall. One of the results of this move was that the company will transfer 424 of its restaurants into a publicly traded real-estate investment trust (Four Corners) and lease most of them back to Darden. The spin is expected to be completely by the end of the year.
First Quarter Results
Darden delivered a solid “beat and raise” on September 22. Adjusted earnings per share came in at $0.68, beating the Zacks Consensus Estimate by 10 cents. It was a whopping 113% increase over the same quarter last year.
Total sales rose 6% to $1.687 billion, ahead of the consensus of $1.676 billion. This was driven in large part by a 3.4% increase in same-store sales. All eight of Darden’s brands delivered positive same-store sales growth, including 2.7% growth at Olive Garden and 4.4% growth at LongHorn.
Like many restaurants, Darden is benefiting from higher disposable income among American consumers thanks to lower gas prices and an improving labor market.
Margin expansion was substantial in the quarter too, driven largely by operating leverage and cost savings initiatives. Cash flow was strong too. Operating cash flow rose 79% to $138.0 million.
Estimates Rising
Following solid Q1 results, management increased its full year fiscal 2016 EPS guidance to $3.15-$3.30, up from the $3.05-$3.20. This prompted analysts to revise their estimates significantly higher for both fiscal 2016 and 2017, sending the stock to a Zacks Rank #1 (Strong Buy).
As you can see, consensus estimates have steadily marched higher over the last several months as Darden has delivered five consecutive positive earnings surprises:
Based on consensus estimates, analysts project 23% EPS growth in 2016 and 14% EPS growth in 2017.
Valuation & Yield
Shares of Darden trade at less than 19x 12-month forward earnings. That’s not cheap, but it at least seems justified by current EPS growth projections. Darden’s enterprise value to trailing EBIT ratio of 17 is a slight premium to the industry median.
Darden also pays a dividend that yields a solid 3.5%.
The Bottom Line
With rising same-store sales, profit margin expansion and positive earnings momentum, Darden still offers investors attractive upside potential.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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