Darden Restaurants: A Great Stock to Consider

Darden Restaurants reports strong 2nd quarter and boasts of consistent double-digit growth

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Restaurant stocks are always a hot favorite among people as there are lots of opportunities. A great player playing well in this industry is Darden Restaurants Inc. (DRI, Financial). This restaurateur has posted excellent quarterly results and has improved its fiscal year 2016 guidance. The company has also initiated a major modification in its structure over the past few years.

Darden Restaurants, the full-service restaurant company, owns and operates more than 1,500 restaurants. The company operates in four segments:

  1. Olive Garden.
  2. LongHorn Steakhouse.
  3. Fine Dining (The Capital Grille, Eddie V's Prime Seafood).
  4. Other Business (Yard House, Bahama Breeze, and Seasons 52).

Through subsidiaries, Darden Restaurants owns and operates all of its restaurants in the U.S. and Canada except for three restaurants located in Florida and three restaurants in California, which are owned jointly by the company and third parties and managed by the company, seven franchised restaurants in Puerto Rico and an Atlanta airport location.

Strong second-quarter results

On Dec. 18, Darden Restaurants reported its financial results for the second quarter ended Nov. 29. Total revenue increased 3.2% to $1.61 billion, compared to $1.56 billion in the year-ago quarter. Adjusted diluted net earnings per share from continuing operations in the reported quarter came in at 54 cents per share and increased at an enormous rate of 92.9% on a year-over-year basis. Darden Restaurants’ adjusted earnings growth drivers are Operating Performance Improvement Growth, Net Legal Settlements, Restaurant Impairments and Net Incremental Impact from Real Estate Transactions. The company’s same-restaurant sales for the quarter increased 1.6%.

Segments’ performance

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Olive Garden is a leading casual dining brand and Italian food service concept in the U.S. Darden Restaurants has taken several steps, such as holistic core menu and promotion plan, new approach to advertising and promotion, robust service strengthening path and exciting new remodel and logo direction. All these strategies have helped the company to provide positive results.

Darden Restaurants’ cash and cash equivalents and long-term debt at the end of the quarter were $857.6 million and $439.5 million.

Dividend and share repurchase

During the quarter, the company’s board of directors has increased its regular quarterly cash dividend by 14% to 50 cents per common share, compared to the minimum quarterly dividend of 43.75 cents disclosed on Nov. 9. Further, the company’s board has authorized a new share repurchase program under which the company may repurchase up to $500 million of its outstanding common stock. This represents approximately 6.7% of the company's outstanding shares based on the last trading day of the quarter.

Projections for fiscal 2016

Darden Restaurants has increased the outlook for fiscal 2016. Same-restaurant sales are expected to be in the range of 2.5% to 3.0%, and adjusted diluted net earnings per share in the range of $3.25 to $3.35. The updated guidance takes into account an expected reduction of diluted earnings per share of approximately 8 cents related to the recently completed real estate transactions, excluding advisory fees and other one-time expenses.

The company expects its segments’ sales for fiscal 2016 will be in the range of 2.5% to 3.0%. For fiscal 2016, it has planned to open 18 to 22 new restaurants and expects capital expenditures in the range of $230 million to $255 million.

Structural change

On Nov. 9, Darden Restaurants announced that it has successfully completed its previously announced spinoff of select real estate and restaurant assets into Four Corners Property Trust Inc. (FCPT, Financial). With this connection, Darden received cash proceeds from Four Corners of $315 million, which it anticipates using, together with cash on hand, to retire approximately $1 billion in debt in the near future while maintaining its investment grade credit profile.

Management

On Oct. 12, Darden Restaurants appointed Matt Broad as its senior vice president, general counsel and corporate secretary. Broad will be responsible for all legal affairs, including corporate governance, labor and employment law, development law, litigation and regulatory compliance. Broad is an analytical business leader with an impressive breadth of experience and has served as a consultant with Axiom, a provider of tech-enabled legal services recently.

(Source: Company Website)

A peek into the restaurant industry

Eating out has become a fashion, and perceptions have changed. There is a constant rise in people's disposable income around the world, and eating out is comforting, too. The economy is improving.

According to reports, the U.S. economy surged by 5% in the third quarter of 2014 (since 2003, this has been the strongest three-month period). Consumer behavior has changed so restaurants have come up with different marketing strategies – loyalty programs, ordering, etc. According to market research firm NPD Group, restaurant traffic will increase 1% this year, an improvement over a flat 2014 guest count.

According to a report submitted by the National Research Association, the restaurant industry will reach some landmark numbers in 2015 – more than $709 billion in sales, 1 million locations and 14 million employees.

On a concluding note

Overall Darden Restaurants is a rock solid company with solid stock price performance, strong revenue growth, reasonable valuation levels, increase in net income and a remarkable record of earnings per share growth. Further, the company has made significant progress to its targets and continues to focus on identifying additional opportunities. This restaurateur won’t let its customers as well as valued investors down in the future.

Disclosure: I do not hold any position in the company.