Darden Restaurants, Inc. DRI seems to be faring well in the immensely competitive restaurant and dining area, which is made evident by the fact that it hit a new 52-week high mark on Friday. DRI stock reached a new 52-week high of $177.67 and pulled back to $176.27 at the end of the trading session.
This casual dining restaurant worldwide operator’s performance seems to be backed by new unit openings, implementation of strategic organic and inorganic business initiatives, and a consistent focus on rewarding its shareholders.
Darden’s shares also outpaced the market in the past month. In the said time frame, DRI stock gained 11%, outperforming the Zacks Retail - Restaurants industry, the Zacks Retail-Wholesale sector and the S&P 500. The detailed price performance is shown in the chart below.
Image Source: Zacks Investment Research
Moreover, in comparison with a few other industry players including Domino's Pizza, Inc. DPZ, Chipotle Mexican Grill, Inc. CMG and McDonald's Corporation MCD, the company’s share price performed well in the past month. During the discussed time frame, DPZ, CMG and MCD grew 10.7%, 9.1% and 1.1% respectively.
Here’s What Driving Darden Stock
Strategic Business Initiatives: To enhance its market reach and foster customer demand, Darden has been undertaking various business initiatives. The initiatives implemented are organic as well as inorganic, ensuring the diversity of its business portfolio to gain a competitive edge in the market.
In October 2024, the company acquired Chuy's Holdings, Inc. for an enterprise value of about $605 million. The acquisition expanded and diversified Darden’s portfolio with more than 100 restaurants across 15 states, serving a distinct menu of authentic Tex-Mex cuisine. Furthermore, in September 2024, the company engaged in a strategic multi-year partnership with Uber Technologies to launch on-demand delivery services. The initiative will begin with Olive Garden, Darden's flagship brand, offering delivery options powered by Uber Direct, Uber’s expansive delivery network. Upon the launch of this initiative, DRI expects to expand the service to more than 900 company-owned Olive Garden restaurants by May 2025.
Footprint Expansion Efforts: Darden's diversified portfolio of offerings has been encouraging its motive of expanding its global reach through new restaurant openings. As of Aug. 25, 2024, the company-owned restaurants were 2,040 compared with 1,998 at the end of the year-ago fiscal quarter.
In the first quarter of fiscal 2025, DRI’s sales increased 1% to $2.8 billion, driven by sales from 42 net new restaurants. This highlights the sales gain from new restaurants across all the reportable segments during the said period. The reportable segments include Olive Garden, LongHorn Steakhouse, Fine Dining and Other Business. In fiscal 2025, the company aims to open 45-50 net new restaurants and projects a total capital spending of $550-$600 million.
Shareholder Value: Apart from investing the free cash flow in expanding and enhancing its business, Darden engages in rewarding its shareholders as well. It ensures that it maintains shareholder value through paying regular dividends and share repurchases. The company’s trailing 12-month return on equity (ROE) is indicative of its growth potential and focus on maintaining shareholder value. Its ROE of 49.5% compares favorably with the industry’s 3.8%, indicating more efficiency in using shareholders’ funds than peers.
DRI Stock Trading Above 50 & 200-Day SMA
Technical indicators suggest a continued strong performance for Darden. From the graphical representation given below, it can be observed that DRI stock is riding above both the 50-day simple moving average (SMA) and 200-day SMA, signaling a bullish trend. The technical strength underscores positive market sentiment and confidence in DRI’s financial health and prospects.
50 & 200-Day Moving Average
Image Source: Zacks Investment Research
DRI Stock Trading at a Discount
Darden is currently trading at a discount compared with the industry peers on a forward 12-month price-to-earnings (P/E) ratio basis. The discounted valuation indicates that despite the recent stock price increase in the past month, it remains an attractive option for investors looking for a suitable entry point.
Image Source: Zacks Investment Research
Estimate Trend Favors DRI
The Zacks Consensus Estimate for Darden’s fiscal 2025 earnings per share (EPS) has remained unchanged over the past 30 days. However, the earnings estimate for fiscal 2026 has moved north in the past seven days. Moreover, the estimated figures indicate 6.6% and 11.2% growth from the year-ago quarter’s figures, respectively.
EPS Trend Revision
Image Source: Zacks Investment Research
What Might Hinder Momentum of DRI Stock?
The top line of the company is faring well thanks to the tailwinds mentioned above. However, the bottom line is hurting from the increased costs and expenses due to the ongoing inflationary pressures in the market. The uptick in the cost and expense structure is mainly caused by increased labor inflation, alongside high restaurant and marketing expenses.
Increased marketing and media activities, an uptick in salary and benefits along with the persisting inflationary market pressures are hitting the margins of the company.
Should You Consider DRI Stock: Yay or Nay?
Per the above discussion, Darden is immensely benefiting from its footprint expansion efforts, strategic partnerships and accretive acquisitions. The leverage from the increased top line is aiding it in maintaining shareholder value, thus boosting the sentiments of the investors.
However, the increase in the company’s cost and expense structure clouds investors’ judgment regarding DRI stock. Nonetheless, its ongoing efforts to ensure operational excellence across its segments might ease the investors’ judgment to some extent.
Based on the overall discussion and the trends of technical indicators, it is prudent for existing investors to hold on to this Zacks Rank #3 (Hold) company’s shares for now, whereas new investors might want to wait for a more favorable entry point.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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