Darden Restaurants: Ring The Register Or Time To Buy?

Key Points

• Darden Restaurants had a solid quarter supported by growth in most segments. 
• Cash flow is sound and sustains a healthy capital return program. 
• Analysts are supporting the stock but may cap gains over the summer. 

Darden Restaurants NYSE: DRI Q4 results and guidance were insufficient to spark a rally, but neither are they a good reason to sell the stock. The company is performing well in a tough environment and managing to improve its operations while growing. The pullback in price action following the Q4 release is a knee-jerk reaction to what is best described as a meh report that could be a tasty opportunity for investors. The long-term growth trajectory is sound, cash flow is healthy, and a healthy capital return program should keep the market interested, and the stock is trending higher. 

Darden Restaurants Has Strong Quarter; Guidance Is Weak 

Darden had a solid quarter, and the guidance is reasonable, if not strong, relative to the analysts' expectations. The company reported $2.8 billion in net revenue for a gain of 6.4%, which beat the Marketbeat.com consensus. The gain was driven by a 4.0% systemwide comp that was aided by 47 new stores and new store additions, although the comp was slightly less than expected. Longhorn Steakhouse led with a gain of 7.1% on a segment basis, followed by a 4.4% increase in Olive Garden Sales and a 2% increase in Other. Fine Dining was the only area of true weakness, contracting by 1.9%. 

The margin news may be the highlight of the Q4 period. The company widened its operating margin by 60 basis points to drive solid outperformance on the bottom line. The GAAP $2.58 in EPS is up 15.2% YOY outpacing the top line growth by 900 basis points and the consensus estimate by 150. This aided an improvement in the balance sheet, including a decrease in debt. The takeaway is that results are sufficient to maintain the growth outlook and the capital return program, including a relatively high-yielding dividend and substantial share repurchases. 

The factor weighing most heavily on the market is guidance, and even that is okay. The company expects revenue from $11.5 to $11.6 billion compared to the consensus of $11.59, and the EPS range compares similarly.  The guidance includes an expected 50 new store openings to underpin growth. Comps will be weak at 2.5% to 3.5% but may outpace expectations over the summer. 

The Analysts: Revisions Are Coming 

The analysts have been supporting Darden Restaurants and may continue to do so now that guidance for 2024 is in. The question is if they will raise their price targets or begin to moderate the upside potential. Until then, the consensus rating is a Moderate Buy, with a price trending steadily higher all year. The consensus target assumes fair value at current levels, but the most recent suggests that a mid-single-digit upside is possible.

In that scenario, the stock will move to a new all-time high over the summer, which could attract new money to the market. The highest target is $187. That assumes 15% of the upside is possible and was set by Citigroup days before the Q4 release and then echoed a few days later by Bank of America. 

The stock pulled back on the guidance, but the bottom was quickly found. The market shows support at the $160 level and the short-term moving average that is consistent with the uptrend. Assuming the market follows through on this move, DRI shares could reclaim the all-time high sooner rather than later.

The critical lines that need to be crossed are $165 and $168, where resistance may be the strongest. If the analysts pull back on their price targets, it could cap the market until later in the year. In that scenario, the company can be expected to lean into share repurchases; it still has $652 million available.