Will Darden Restaurants (DRI) Continue To Surge In 2018?

Leading casual dining restaurant operator Darden Restaurants, Inc. (NYSE:DRI) exhibited impressive price performance in 2017. In the past year, the stock has returned 36.2% compared with the industry’s gain of 19.5%.

Further, its fiscal second-quarter 2018 earnings beat and upgraded guidance for fiscal 2018 makes us increasingly optimistic about the stock.

Let’s see what the New Year holds in store for Darden.

Cheddar's Synergy Estimates Look Promising

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 from its stockholders including private-equity firms, L Catterton and Oak Investment Partners. The acquisition has added an undisputed casual dining value leader to Darden's portfolio of differentiated brands and further enhanced its scale.

Cheddar's seems to be a great fit as it not only complements Darden’s existing brands but is also expected to aid in attracting customers, given its extensive appeal. This in turn should drive Darden’s comps and consequently sales.

Excluding certain expenses, Darden anticipates the transaction to be accretive to its adjusted per share in fiscal 2018 by roughly 12 cents per share. The company expects to realize synergies of $22 million to $27 million by the end of fiscal 2019.

Brand Renaissance Plan for Olive Garden and Other Initiatives

In order to boost the performance of the Olive Garden brand, the company implemented a set of initiatives under its Brand Renaissance Plan. These included 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 focused on remodeling and bar refreshes. The revamped restaurants are already generating high same-restaurant sales and returns and are expected to do so through 2018. The company intends to continue investing in re-modeling for optimal returns.

Meanwhile, it is also focusing on technology-driven initiatives like the system wide rollout of tablets in order to capitalize on the digital wave that has hit the U.S. fast casual restaurant sector. This initiative has boosted sales in the past few quarters and the momentum is expected to continue through 2018.

Darden Restaurants, Inc. Revenue (TTM)

Initiatives to Attract Guests at LongHorn and Other Units

At LongHorn, the company strives to attract guests by focusing on the core menu, culinary innovation and providing regional flavors. It is also working on its marketing strategy to improve execution; customer relationship management and digital advertising as well as a strong promotional pipeline that leverage the segment’s expertise. Further, the company continues to focus on strengthening its in-restaurant execution through strategic investments in quality and simplification of operations in order to augment the guest experience. Owing to these efforts, segment comps have increased in the past 18 consecutive quarters and the momentum is expected to continue in 2018.

Meanwhile, the Capital Grille, Yard House, Seasons 52, Bahama Breeze and Eddie V have also posted positive comps in most of the quarters since the beginning of fiscal 2014. Sales have increased on the back of various initiatives undertaken and personalized services, which should also aid long-term growth.

Cost Saving Efforts to Reap Benefits

The company is focusing on an aggressive cost management plan, under which it has been able to significantly cut operating costs. In fact, for fiscal 2018, the company expects 10-40 basis points year-over-year margin expansion as a result of cost savings. Moreover, the company plans to reinvest any incremental savings in pricing and long-term growth drivers for the business, particularly emphasizing on enhancing quality to drive market share gains.

Upward Estimate Revisions for 2018

Analysts have increased their estimates for fiscal 2018, which makes the earnings picture favorable. Over the past 60 days, 10 estimates have gone up compared with one downward revision. This trend has caused the consensus estimate to trend higher, going from $4.43 a share 60 days ago to its current level of $4.52 for 2018.

Zacks Rank and VGM Score

The company has a Zacks Rank #2 (Buy) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or #2 offer the best investment opportunities for investors. Thus, the company appears to be a compelling investment proposition at the moment.

Zacks Rank and Stocks to Consider

Darden has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space are Famous Dave's of America, Inc. (NASDAQ:DAVE) , Arcos Dorados Holdings Inc. (NYSE:ARCO) and Good Times Restaurants, Inc. (NASDAQ:GTIM) .

While Famous Dave's of America sports a Zacks Rank #1, Arcos Dorados and Good Times Restaurants carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

One estimate for the 2018 moved north in the past 60 days versus no southward revisions in case of all three companies.

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