Darden Restaurants Beat Q2 Estimates; Shares Down 5%

American multi-brand restaurant operator Darden Restaurants, Inc. (DRI) delivered robust second-quarter results aided by a reopening economy and solid underlying business momentum.

The company also increased its full-year fiscal 2022 guidance and announced the transition of its CEO. Following the news, shares fell 5% to close at $139.83 on December 17.

Robust Results

DRI reported earnings doubled to $1.48 per share compared to the same period last year, and came in 5 cents higher than analysts’ estimates of $1.43 per share.

Furthermore, sales jumped 37% year-over-year to $2.27 billion, outpacing Street estimates of $2.23 billion. The growth was aided by same-store sales growth of 34.4% compared to the year-ago period, and the opening of 34 net new restaurants.

Management Comments

Darden Chairman and CEO, Gene Lee, said, “Our people fuel our success, which is why we have invested more than $200 million in our team members over the past two years. Given the strength of our performance, we are accelerating a commitment we announced earlier this year to increase the minimum hourly earnings for restaurant team members to $12, which includes income earned through gratuities, effective January 1, 2022. With this change, we expect our restaurant team members will earn, on average, approximately $20 per hour.”

Updated Outlook

Based on the current business momentum, Darden has increased its full-year fiscal 2022 outlook.

For FY22, DRI now forecasts sales to be between $9.55 billion and $9.70 billion compared to the consensus of $9.54 billion. Similarly, same-store sales are projected to grow by 29% to 31% over fiscal 2021.

Additionally, DRI projects earnings to fall in the range of $7.35 per share to $7.60 per share versus the consensus of $7.62 per share. Furthermore, the company expects to open 35-40 new restaurants during the period.

Dividend and Share Repurchase

The company’s Board declared a quarterly cash common DRI stock dividend of $1.10 per share, payable on February 1, 2022, to shareholders on record as of January 10, 2022.

Moreover, at quarter-end, the company had $761 million remaining under its share buyback program.

CEO Transition

The company also announced that effective May 29, 2022, the current Chairman and CEO Eugene (Gene) I. Lee, Jr. will retire as CEO but will continue to serve on DRI’s Board as Executive Chairman until the 2022 Annual Shareholder Meeting.

The Board has elected Ricardo (Rick) Cardenas, 53, Darden’s current President and Chief Operating Officer, as the CEO and board member, effective May 30, 2022.

Analysts’ View

Responding to the company’s performance Stifel Nicolaus analyst Christopher O’Cull maintained a Hold rating on the stock with a price target of $165, which implies 18% upside potential to current levels.

Commenting on his cautious view of the stock, O’Cull said, “While we continue to believe Darden’s management team is one of the strongest in the industry, we are not confident sales recovery will meaningfully outpace Street estimates and expect shares could be range-bound as expectations have been adjusted higher. Despite these concerns, we remain confident in Darden’s long-term competitive position and would become more constructive on the shares if presented with a favorable entry point.”

Overall, the stock has a Moderate Buy consensus based on Analyst Ratings of 13 Buys and 6 Holds. The average Darden Restaurants price target of $170.32 implies 21.8% upside potential to current levels. Shares have gained 19.6% over the past year.

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