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Here's Why Darden Restaurants, Inc. Stock Surged 15% Today


What happened

Shares of Darden Restaurants, Inc. (NYSE: DRI) finished trading up 14.7% on June 21, 2018. This marks a wonderful recovery for investors who bought near the start of the year, shifting Darden shares from a 3% loss to an 11% gain since the calendar turned to 2018.

Today's big gain was a result of the market's reaction to the release of the company's fiscal year 2018 fourth-quarter earnings (earnings call transcript here ), which included solid improvements on both the top and bottom lines from the year-ago quarter. Sales were $2.13 billion from continuing operations, up 10.3%, while earnings per share increased 41% to $1.40 ($1.39 on an adjusted basis ).

So what

The company behind famous restaurant chains including Olive Garden and LongHorn Steakhouse, among a half-dozen others, didn't just deliver double-digit earnings and sales growth in the quarter, but also delivered earnings that came in ahead of Wall Street analyst expectations for adjusted EPS of $1.35. And while analyst estimates aren't really a great gauge for company results, it's relatively common for a stock to do well after reporting results that beat Wall Street's best guess.

Exterior view of LongHorn Steakhouse location.

Image source: Darden Restaurants.

But that's only part of the story for Darden this quarter. The company also reported relatively healthy comps results for its core brands, with sales at restaurants open for at least one year up 2.2%, while traffic at Olive Garden and LongHorn, which make up almost 72% of total sales, held steady and actually increased very slightly in both the fourth quarter and for the full fiscal year. Considering the intense pressure the entire restaurant industry had been under during the recent "restaurant recession" that saw many chains deal with reduced traffic and falling sales, this is a very positive result for Darden from two of its most important brands.

While the company has made tremendous progress across most of its restaurant brands over the past couple of years, its most recent acquisition, Cheddar's Scratch Kitchen, continues to lag. The chain's comp sales fell almost 5% last quarter, even worse than in the prior quarter , which marked the one-year anniversary of the $780 million acquisition of what Darden's CEO described at the time as "an undisputed casual dining value leader."

Now what

Heading into fiscal 2019, Darden is expecting total sales to increase 4%-5% for the year, with modest comps growth between 1% and 2%. Management is counting on those new sales, as well as debt repayment and operational improvements to pay off on the bottom line, with earnings per share expected to increase 13% to 16%, to a range of $5.40-$5.56 per share.

Darden's improved profitability is being shared with investors, too. The board approved a 19% dividend increase to $0.75 per share on a quarterly basis. On a forward basis, that's worth a 2.8% yield at recent prices.

Based on the company's guidance, Darden's shares trade for just below 20 times next year's earnings. While not exactly bargain-bin priced, it's also not crazy-expensive so long as the company can both deliver on its double-digit earnings-per-share predictions this year, and then continue to deliver similar results in the years to come. Management has a plan in place to deliver, needing only modest sales growth and expansion, while leveraging Darden's scale as well as repurchasing shares to augment per-share returns.

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Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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



This article appears in: Personal Finance , Stocks
Referenced Symbols: DRI


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