A Tasty Entry Point Into Darden Restaurants International

Darden Restaurants International Overdelivers On Results

Darden Restaurants International (NYSE: DRI) and the entire sit-down restaurant industry have had a hard time with the reopening recovery. Not only did stay-at-home trends and social distancing keep traffic away longer than with other industries but rising costs and labor shortages cut deeply into the top and bottom-line results. The takeaway for today is that the restaurant business is gaining momentum and efforts to mitigate supply chain issues, rising food costs, and labor shortages have Darden Restaurants International, at least, in a prime position to make money. Restaurant traffic is on the rise despite the rise in inflation and profitability is reaching a crescendo that has this company raising its dividend and increasing the buyback. 

Darden Restaurants International Beats And Raises 

The price action in Darden Restaurants corrected to a key support level over the past year and we think this is an attractive entry point into the name. The catalyst for higher share prices are better than expected results, enhanced profitability, and an increase in the guidance that points to additional strength later in the year. Turning to the results, the company posted revenue of $2.6 billion or up 14% from last year and 230 basis points better than the Marketbeat.com consensus. The strength was driven by an 11.7% comp store gain coupled with 33 net new stores. On a segment basis, Fine Dining led with a growth of 34.5% followed by a 10.6% gain at Longhorn Steakhouse and a 6.5% gain at Olive Garden. More importantly, the company’s revenue is up 16.6% from the pre-pandemic level and the forecast for growth is positive. 

The company experienced some margin compression but was able to offset most of the shrinkage via cost controls and pricing efforts. In regard to food and labor costs, the business two largest input costs, inflation increased 22.4% and 20.1% respectively. The takeaway here is that the operating margin shrank only 100 bps versus last year and left the GAAP EPS above the consensus. The GAAP EPS of $2.24 is down from last year’s GAAP EPS due to a one-off tax-related factor but up $0.20 or about 10% from last year’s adjusted EPS. 

The guidance is a little mixed but leaves ample room for upside surprises. The company is expecting full-year fiscal 2023 revenue in a range of $10.2 to $10.4 billion compared to the $10.24 consensus estimate but that is not counting the addition of 55 to 60 new stores. On the bottom line, the company is expecting $7.40 to $8.00 in earnings from continuing operations which is below the consensus of $8.13. The takeaway for us is that continuing operations are showing organic momentum and there are new stores on the way, regardless of the earnings versus consensus the cash flow is strong, the dividend is safe, and repurchases are ongoing. 

Darden Restaurants Increases Capital Allocations 

Darden Restaurants is a relatively high-yielding dividend company paying out roughly 3.8% in yield with shares trading at their recent lows. The dividend is backed up by a strong balance sheet as well, and it comes with a high likelihood of future increases. The company just increased by 10% making the 3rd increase since the pandemic began and the highest payout on record. In regard to the buybacks, the company repurchased approximately 1.6% of the market cap during the quarter and raised the allotment by another $1 billion which is worth 7% of the market cap with shares trading at $115. We view both the dividend and the buybacks as strong tailwinds for the price action. 

The Technical Outlook: Darden Restaurants Confirms Support 

The price action in Darden Restaurants hit a strong support level days before the results were released and it is now confirming support at this level. Assuming the market follows through on this move, we see shares of the stock moving higher in the near term with a chance of regaining the upper side of the 150-day moving average. In this scenario, price action should trend higher over the summer and into the fall with the possibility of hitting the $160 level. If not, shares of the stock may wallow near the current levels until there is more clarity on the economy, the recession, and the health of the consumer.