Darden Restaurants and the slow grind of success

Darden Restaurants NYSE: DRI is no high-flying growth name, but it is a solid company whose management operates with a long-term vision for driving shareholder value. The latest report is a testament to that, revealing sustained growth, expanding reach and widening margin. 

Among the takeaways is that cash flow remains solid, keeping the capital return program in play. That program includes dividends, dividend growth and share repurchases with a share count down 1.8% YOY basic and diluted. Because the company operates with the long-term in mind, these trends are expected to continue in 2024 and 2025. 

Margin shines at Darden Restaurants

Darden Restaurants had a solid quarter, with strength in its core operating segments offsetting a small weakness in the fine dining venues. The company reported $2.72 billion in net revenue, including the addition of Ruth’s Chris and 45 new stores, but missed the Marketbeat.com consensus estimate by a slim margin. That miss is offset by robust performance on the bottom line aided by all segments. 

On a comp basis, sales are up 2.8%; segmentally, Longhorn Steakhouse led with a gain of 4.9%, followed by a 4.1% advance by Olive Garden. The fine dining venues contracted by -1.7%. 

Margin news is the best. The company widened the margin at the gross and operating levels for all segments to drive outperformance on the bottom line. The GAAP earnings of $1.76 grew by 15% YOY and adjusted by 21% to outpace expectations by 700 basis points, and the strength is seen in the guidance. 

The company lowered its revenue outlook to the low end of its previous range. Still, it raised the forecast for earnings due to operational performance, putting consensus near the low end and spurring analysts into action. 

Darden Restaurants has robust market support 

Darden Restaurants is well-liked by analysts, institutions and fund holders. The 20 analysts' ratings tracked by Marketbeat.com have it pegged at Moderate Buy with a price target that has trended upward all year while institutions have been buying. The institutional interest is about 95% of the shares, and the group has bought on balance for five consecutive quarters. Institutional activity is broad, including a significant portion held by mutual funds and numerous investment firms. 

The post-release analyst activity favors share prices and includes one reiterated rating and one boosted price target. Both firms have the stock pegged at an Overweight/Outperform equivalent with a price target suggesting upward movement in the price action will continue. The two targets are $170 and $177, with an average of $173.50 compared to the $170 consensus. That’s not a large gain for shareholders, but it would be a new all-time high and significant because it could attract new money and bullish traders into the market. 

Darden offers value, yield and repurchases 

Darden is among the higher-valued restaurant stocks. However, the 18X valuation comes with market-leading growth, a quiver of diverse brands with a loyal following, a better-than-average dividend and share repurchases. The yield is worth about 3.2%, with shares trading near record levels and is compounded by repurchases. 

Repurchases are whittling down the share count and are expected to continue at least over the next two quarters. The Q2 pace of buybacks will use up the current allocation by the fiscal year-end, setting up a potential catalyst should the company expand on the program for the next fiscal year. Regarding the balance sheet, debt it less than 1X equity, leaving the company in a healthy financial position and ready to invest in growth when the opportunities arise. 

The technical outlook: Darden Restaurants is trending toward a record high

Darden Restaurants' price action was corrected in calendar Q3 but hit bottom and rebounded in a trend-following signal and Vee-formation. This pattern shows tremendous market support and is compounded by bullish indicators. The chart suggests the price action will continue to increase and retest the all-time high soon. The question is whether the market will move up to set a new high or become range-bound near current levels.