We are reverting to a Neutral recommendation on
Darden Restaurants Inc.
) from Underperform owing to revival in same store sales in three
of its struggling key brands - Red Lobster, Olive Garden and
LongHorn Steakhouse in the fourth-quarter of 2013. However, some
issues which might restrict margin growth keep us on the
sidelines at the current level.
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Why Back to Neutral?
Darden has undertaken a set of initiatives to trigger sales at
three of its core brands. These include focusing on
value-proposition and promotional offers, revealing affordable
price certainties and introducing a new menu, all of which paid
off in the fourth quarter of 2013. In fact, Darden remains poised
to improve guest count and check growth through affordable
pricing in 2014 owing to a soft consumer discretionary spending
Another tailwind for the company is the emergence of its
Specialty Restaurant Group (SRG) brand, which has grown steadily
over the last couple of quarters. The Specialty Restaurant Group
mainly caters to young, multicultural and high-income guests,
which helps it to survive economic volatility. Further, two big
ticket acquisitions in recent times -- Eddie V's and Yard House -
will also boost the brand.
Despite these enthusiastic facts, some concerns prevent us from
being too optimistic on the stock. Darden delivered
lower-than-expected earnings this season, probably due to
steeper-than-expected price discounting. Earnings also declined
on a year-over-year basis.
Several issues like the Affordable Care Act, higher food and
beverage expenses expected in the first half of fiscal 2014 as
well as increased incentive compensation are expected to limit
margin. Darden currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Others players in the same industry, which look attractive at
current levels include
The Wendy's Co.
Brinker International Inc.
BJ's Restaurants Inc.
) all carrying a Zacks Rank #2 (Buy).