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Darden Shares Up 11.6% in 3 Months: What's Driving the Stock?

Darden Restaurants, Inc. DRI is poised to benefit from digitalization, menu innovation and other sales-building initiatives. Also, solid performance by Olive Garden and LongHorn Steakhouse segments along with operational readjustments are adding to the upside.

In the past three months, shares of Darden have gained 11.6% compared with the industry’s 12% growth. Moreover, an upward revision in earnings estimates for fiscal 2021 reflects analysts’ optimism regarding the company’s growth potential. Over the past 60 days, the Zacks Consensus Estimate for fiscal 2021 earnings has moved up 1.4% to $2.88 per share.

Factors Driving Growth

Darden is focusing on technology-driven initiatives like the system-wide rollout of tablets in order to capitalize on digitization, which has rapidly penetrated the U.S. fast-casual restaurant sector. This initiative has been boosting the company’s sales over the past few quarters.

Moreover, the company strives to attract guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, allowing menu customizations and making smarter promotional investments. Notably, the operational readjustments are likely to drive the company’s performance going forward.

Meanwhile, Darden’s acquisition of the small restaurant chain, Cheddar's Scratch Kitchen (Cheddar's), in April 2017 has added an undisputed casual dining value to the company’s portfolio of differentiated brands. It also helped Darden enhance its scale. Further, management made significant operational readjustment to the brand, which is expected to reap long-term benefits.

During the fourth quarter of 2020, the company rolled out online ordering facility for Cheddar's as well as other brands that did not have this facility earlier. This also included online sales of alcohol for all brands. Moreover, to reduce friction and enhance consumer convenience in the digital platform, the company initiated streamlining of order pickup process and payment methods. Backed by these initiatives, online ordering at Olive Garden and LongHorn grew more than 300% and 400% compared to the prior year, representing 58% and 49% of To Go sales, respectively.

Nonetheless, the company stated that it has enough liquidity to survive the coronavirus pandemic for some time. As of May 31, 2020, the company’s cash balance totaled nearly $763.3 million. Moreover, the company has access to $750.0-million credit facility, reaching the liquidity mark to more than $1.5 billion. Lately, the company has been generating positive cash flow, which is adding to the positives. As of May 31, the company’s long-term debt stands at $928.8 million, compared with $927.7 million at the end of May 26, 2019. At the end of fourth-quarter fiscal 2020, the company had a total debt-to-capital ratio of 0.34, which indicates that its debt levels are manageable.

Zacks Rank & Other Key Picks

Darden currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other top-ranked stocks in the same space include Papa John's International, Inc. PZZA, Jack in the Box Inc. JACK and El Pollo Loco Holdings, Inc. LOCO. Papa John's sports a Zacks Rank #1, while Jack in the Box and El Pollo Loco carry a Zacks Rank #2.

Papa John's has a three-five year earnings per share growth rate of 8%.

Jack in the Box’s 2021 earnings are expected to increase 17.7%.

El Pollo Loco has a trailing four-quarter earnings surprise of 94.1%, on average.

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