Darden Banks On Cheddar's Buy & Sales Initiatives, Risks Stay

On Oct 2, we issued an updated research report on one of the largest casual dining restaurant operators worldwide Darden Restaurants Inc. (NYSE:DRI) .

Last week, the company posted better-than-expected first-quarter fiscal 2018 results with both earnings and revenues surpassing the Zacks Consensus Estimate. In fact, this quarter marked the 12th consecutive earnings beat for Darden.

Cheddar’s Acquisition - A Key Positive

In April 2017, Darden completed the acquisition of small restaurant chain, Cheddar's Scratch Kitchen (Cheddar's), in an all-cash deal worth $780 million. Excluding certain expenses, it anticipates the transaction to be accretive to its adjusted per share in fiscal 2018 by roughly 12 cents per share.

Additionally, Darden believes that this buyout will allow it to further fortify two of the company’s most vital competitive advantages — considerable scale as well as wide-ranging data and insights — going ahead.

In fact, as the company progresses with the integration of Cheddar’s, it gains more confidence in its synergy estimates. Management now expects to realize synergies of $22 million to $27 million by the end of fiscal 2019 (up from previously projected range of $20 million to $25 million).

Efforts Taken to Boost Sales at Other Brands

In order to boost the performance of the Olive Garden brand, the company has implemented a set of initiatives under its Brand Renaissance Plan. These include simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, developing new core menu items, allowing customization and making smarter promotional investments.

Also, the brand is focusing on remodeling, bar refreshes and technology-driven initiatives. The initiatives include the system wide rollout of tablets, launch of mobile ordering, the To Go business as well as catering in the United States, and are expected to add to its top line. Markedly, Olive Garden posted the 12th consecutive quarter of positive comps in fiscal first quarter backed by these initiatives.

At LongHorn, Darden strives to attract guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on its marketing strategy and continues to focus on strengthening its in-restaurant execution in order to augment the guest experience. Owing to these efforts, segment comps have grown for the past 18 consecutive quarters.

Meanwhile, the company aims to continue driving sales at the Capital Grille, Yard House, Seasons 52, Bahama Breeze and Eddie V via various strategic initiatives and personalized services, which might also aid long-term growth.

Challenges

Darden’s shares have declined 5.8% over the past six months, as against the industry’s growth of 5.9%. Also, the Zacks Consensus Estimate for current-quarter and current-year earnings has moved down 5.4% and 0.2% over the past month. This reflects ongoing pessimism in the stock.

Furthermore, higher labor costs due to the implementation of Affordable Care Act, commonly known as Obamacare, continue to have an adverse impact on margins of restaurant operators like Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) , Brinker International Inc. (NYSE:EAT) , Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) and many others, including Darden that have more company-owned units and laborers. In addition, the non-franchised model makes the company susceptible to increased expenses.

Meanwhile, the second quarter of 2017 marked the sixth consecutive quarter of negative comp sales for the restaurant industry as a whole, thus continuing the somber mood. Hence, persistent challenging sales environment in the U.S restaurant space is a cause of concern and may continue to keep the top line under pressure.

Bottom Line

Despite the prevalent headwinds, most of Darden’s brands have been witnessing growth for the last few quarters, given various sales initiatives like operational excellence, menu innovation along with technology-driven moves.

Moreover, the acquisition of Cheddar's has added an undisputed casual dining value leader to the company’s portfolio of differentiated brands that might further drive comps and resultantly sales.

Darden carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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