Here’s Why You Should Retain Darden (DRI) in Your Portfolio

Darden Restaurants, Inc.‘s DRI is likely to benefit from menu simplifications, an off-premise business model and technological enhancements. However, a decline in traffic from pre-pandemic levels and a rise in food and labor costs are a concern.

Let’s discuss the factors highlighting why investors should retain the stock for the time being.

Factors Driving Growth

Darden strives to attract guests by focusing on the core menu, culinary innovation and providing regional flavors. It is also working to simplify kitchen systems, improve staffing levels and operational excellence to enhance guest experience, enable menu customizations and make smarter promotional investments. The operational readjustments are likely to drive the company’s performance, going forward.

Even though capacity restrictions continue to ease, off-premise sales remained strong during second-quarter fiscal 2022. For second-quarter fiscal 2022, off-premise sales contributed 28% of total sales at Olive Garden and 15% at LongHorn. The company has been benefitting from technological enhancements with reference to online ordering, the introduction of To Go capacity management and Curbside I’m Here notification. Given the solid feedback about better customer experience and reduced friction, the company anticipates off-premise sales to remain high for some time. The company intends to revamp its point-of-sale system to boost guest experience and manage off-premise offerings.

To reduce friction and enhance consumers’ convenience in the digital platform, Darden initiated streamlining the order pickup process and payment methods. Backed by these initiatives, online ordering has increased sharply. Additionally, it is witnessing a sharp increase in To Go sales. During second-quarter fiscal 2022, 60% of all off-premise sales were placed digitally. Going forward, the improvements in business model are likely to reinforce its ability to boost restaurant value across its brands.

Maintaining liquidity during the pandemic is an arduous task during the pandemic. As of Nov 28, 2021, Darden’s cash and cash equivalents came in at $746.3 million compared with $947.8 million as of Aug 29, 2021. Although the cash balances have declined sequentially, the company believes that it has enough liquidity to support operations for some time. Also, it stated the availability of $1-billion net borrowing available under the revolving credit facility. The company is generating positive cash flow lately, adding to the positives. The long-term debt as of Nov 28, 2021, came in at $929 million compared with $936.7 million as of Aug 29, 2021. However, the company’s times-interest-earned ratio during the quarter came in at 15.4x, up from 13.9x reported at the preceding quarter-end. This indicates that the company is in a better position to meet debt obligations.


Image Source: Zacks Investment Research

Shares of Darden have declined 3.4% in the past three months compared with the industry’s 2.1% fall. The dismal performance was primarily caused by the coronavirus crisis. Notably, pandemic-induced restrictions, labor challenges and supply chain disruptions had taken an enormous toll on the company. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.

The company has been persistently shouldering increased expenses, which are denting margins. In the fiscal second quarter, total operating costs and expenses increased 32.1% year over year due to a rise in food and beverage costs, restaurant expenses as well as labor costs. For fiscal 2022, the company expects total inflation of 5.5% (up from the prior projection of 4%); commodities inflation of 7-8% (significantly up from 4.5% estimated earlier) and total restaurant labor inflation of 6-6.5% (compared with 5.5% anticipated earlier).

Zacks Rank & Key Picks

Darden currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector include Arcos Dorados Holdings Inc. ARCO, The Home Depot, Inc. HD and Domino’s Pizza, Inc. DPZ.

Arcos Dorados sports a Zacks Rank #1. ARCO has a long-term earnings growth of 42.9%. Shares of the company have increased 9.5% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and earnings per share (EPS) suggests growth of 10.4% and 255.6%, respectively, from the year-ago period’s levels.

Home Depot sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 12.1%, on average. Shares of the company have surged 40.2% in the past year.

The Zacks Consensus Estimate for Home Depot 2022 sales and EPS indicates a rise of 13.6% and 28.8%, respectively, from the year-ago period’s levels.

Domino’s currently carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 1.7%, on average. Shares of the company have increased 30.4% in the past year.

The Zacks Consensus Estimate for Domino’s 2022 sales and EPS suggests growth of 6.9% and 12.8%, respectively, from the year-ago period’s levels.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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