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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