Darden Restaurants Is Serving What The Market Wants

Darden Restaurants Exceeds All Expectations

Darden Restaurants’ NYSE: DRI fiscal Q1 earnings results reminded us that not all S&P 500 companies are the same. While the headwinds of inflation are blowing strongly through the market, Darden has been able to outperform on all metrics where other S&P 500 companies have not. The company not only beat its Q1 consensus, but its business is above the pre-COVID levels, its margins are growing, and the guidance is favorable. If you're looking for a high-quality dividend growth stock that's also actively buying back shares, Darden Restaurants qualifies and is poised to outperform during the fourth quarter and in 2022.

It's Time For Another Helping Of Darden Restaurants

Darden Restaurants had a truly good quarter despite headwinds blowing throughout the economy. The difference with Darden compared to some others in the market is that its business is more domestic than not, and it is much less reliant on the global supply chain than it is on the domestic. That said, the company's $2.31 billion in consolidated revenue is up 51% over last year and beat the consensus estimate by 310 basis points.  Last year's comp was very easy so the 51% isn't as great as it sounds but that is mitigated by 2-year growth.  On a two-year basis, Darden Restaurants sales are up 8.5% and on track to expand again next quarter and next year.

On a comp basis, sales are up 47.5% versus the 44% expected by the analysts. Sales were strong in both of the cores Olive Garden and Longhorn Steakhouse chains. Olive Garden sales grew 37% while Longhorn Steakhouse grew 47%. Sales in both the fine dining and other categories were also strong, fine dining saw outsized growth above 80% while the other category lagged the group.

Moving down the report, the company experienced a significant margin expansion at both the gross and operating levels. Gross margins expanded by nearly 1,000 basis points while operating margin expanded by more than 1,000 basis points. Together, margin gains and revenue strength delivered GAAP earnings of $1.76 which is more than 200% better than last year, 27.5% better than Q1 2019, and 7.3% better than the consensus. 

Darden Restaurants Guides Higher And Increases Its Capital Returns

Two catalysts for Darden Restaurants’ share prices are an increase in guidance and an increase in the share buyback program. The company is now expecting full-year revenue in the range of $9.4 billion to $9.6 billion versus the Marketbeat.com consensus estimate of $9.41 billion. The company expects comp sales to run in the range of 27% to 30% and to be aided by the addition of 30 to 40 new stores. Adjusted earnings should come in the range of $7.25 to $7.60 versus the consensus of $7.44 and we are leaning towards the high end of the range. 

As for buybacks, the company bought back $186 million in shares during the quarter and has over $275 million left on the buyback plan. The company also added a new allotment of $750 million bringing the total allotment for the buyback to over $1 billion. That's worth about 5.25% of the market cap.

The Technical Outlook: Darden Restaurants Sets A New All-Time High

Shares of Darden Restaurants are up more than 5% in the wake of the Q1 earnings release and guidance update. The move has opened a significant gap in price action and put the stock at a new all-time high. Early action shows evidence of some resistance to this price level but we view this as profit-taking more than anything else. In the near term, price action may retreat to close the window or consolidate around its current levels. Longer-term, we expect to see Darden Restaurants continue its uptrend and move up to the $175 range. Darden Restaurants also pays a very safe dividend worth 1.76% in yield.