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Olive Garden Parent Darden Still a Buy at 2 Firms - With Covid Caveat

Analysts at Keybanc and Credit Suisse remained bullish about Darden's outlook while noting that rising infections and inflation could hurt its valuation.

Darden Restaurants  (DRI) - Get Darden Restaurants, Inc. Report, which operates Olive Garden, LongHorn Steakhouse and Capital Grille, was affirmed as a buy at two Wall Street investment firms, with a caveat tied to the coronavirus.

The Orlando, Fla., company recently said Chief Executive Eugene "Gene" Lee Jr. would retire after seven years.

"We remain bullish on the largest casual dining company, with a focus on generating high quality sales and identifying opportunities to enhance productivity supporting confidence in DRI’s ability to capitalize on market share opportunities & generate sustainably higher margins," Credit Suisse analyst Lauren Silberman wrote in a note to investors.

Credit Suisse has an outperform rating on the stock with a price target of $180 a share.

The investment firm trimmed its earnings per share guidance for Darden over the next two years to $7.67 and $8.74 for fiscal 2022 and fiscal 2023, respectively.

Keybanc was more conservative in its outlook for Darden, given the rise in Covid omicron infections, and lowered its price target on the restaurant company to $170 from $172 a share. Keybanc maintained an overweight rating for Darden stock.

"We are trimming our price target and EPS estimates slightly, reflecting persistent inflation and limited [near term] sales visibility as infection rates rise," wrote Keybanc analysts Eric Gonzalez and Benjamin Blake in a note.

Keybanc noted that the sudden rise in commodity prices coupled with staffing shortages have weighed on full-service restaurant stocks recently. "But Darden may be faring better than its peers," said Gonzalez.

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"We also believe the CEO transition likely adds a level of insecurity to the story (albeit unjustifiably, in our view)," Gonzalez added.

"That said, [same-store sales] trends remain robust with no impact from the omicron variant thus far, and the company appears to be doing a better job than most at protecting profitability with expense reductions and targeted price increases," Gonzalez said.

Keybanc said that demand for full-service dining experiences remains strong. "We see a bright future for Darden’s portfolio that includes permanent cost savings, a “sticky” off-premise business, and [long-term] share gains as the industry finds equilibrium," Gonzalez added.

"We view Darden to be a portfolio of well-regarded brands with ample liquidity, best-in-class [research and development/consumer insight capabilities, an experienced management team, and scale advantages in supply chain and national advertising that should position it as a long term share gainer after the outbreak subsides—even if the country’s near to medium term economy is uncertain."

Lee, who steered Darden Restaurants during the pandemic and oversaw a quadrupling of its market cap since then, is retiring as CEO, the company said last week.

Lee, 60, is set to retire as CEO on May 29. The company said he'll be executive chairman until the 2022 annual meeting and then become non-executive chair.

Darden President and Chief Operating Officer Ricardo Cardenas will succeed Lee as CEO from May 30. 

Shares of the company at last check dropped 3.3% to $135.27.