Darden Restaurants: New Acquisition Can’t Dampen A Promising Outlook

Signage is displayed at a Darden Restaurants Inc. Olive Garden location in Reno, Nevada, U.S., on Thursday, March 19, 2015. Photographer: David Paul Morris/Bloomberg via Getty Images

Darden Restaurants, Inc. (NYSE: DRI), based in Orlando, owns and operates a growing network of 1,785 full-service restaurants mainly in the United States. As full-service restaurant sales growth in 2018 outpaced their limited-service counterparts for the first time since 2014, DRI has gained close to 25.4% so far this year (compared to c. 19.1% of S&P 500).

Declining profitability and same-restaurant sales of the ‘Other Business’ segment which includes the recently-acquired Cheddar’s Scratch Kitchen brand, is offset by rising margins of the remaining segments accounting for nearly 80% of DRI’s total sales. Therefore, management’s revenue and earnings guidance for FY20E look solid as Cheddar’s witness improving guest counts and profits, while DRI’s largest unit, the Olive Garden brand, gradually grows its promising delivery business.

Meanwhile, strong cash flows and little leverage backed by growing profits assures sustainable shareholder returns unless the company pursues more acquisitions in an environment of cheaper debt. Therefore, in addition to the rising dividend yield, an upside opportunity exists for DRI as its current TTM PE trades at a discount to the average TTM PE over the past four years.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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