3 Reasons Darden Restaurants Has Been Killing it

Management at Darden Restaurants (DRI) has been cooking up a storm this year. 

The surging restaurant brand, parent company of heavily advertised Olive Garden,  beat Wall Street estimates on its earnings report Thursday Sept. 20. It posted earnings of $1.32 per share, vs. estimates of $1.24. Same-store-sales rose 3.3% year-over-year, beating expectations of 2.1%. The stock popped on the earnings print, and the gains have been a microcosm of what the brand has done for the entire year. 

Darden beat earnings estimates in its June quarter, bringing the stock up by almost 17% in the two days sandwiching the earnings print. Until that point, the stock had been down roughly 3% for the year. Despite first-half 2018's slight hiccup, the restaurant chain has actually performed handsomely since current CEO Eugene Lee took over in late February 2015. Since that point, the company has almost doubled in value. 

Analysts were quick to highlight the chain's strengths. Here are some things Dardnen has gotten right of late to continue its surge. 

In-Restaurant Execution

"Darden has the best of both worlds with in-restaurant execution/everyday value," RBC analyst David Palmer wrote in a note to clients Friday. Part of that picture is the company's investment in both its employees and food. "Darden has been reinvesting in its people and food," Palmer said, adding that Darden will spend an additional $35 million on those things in the next year or so. Perhaps a tailwind to the brand strength, management has focused on simply making the product and the service better, in lieu of short-term promotions. "It has been slowly shifting spending away from limited time offers to a combination of everyday value, quality improvements, and longer-term promotion windows," Palmer said. 

JPMorgan analyst John Ivankoe agrees with Palmer on employee productivity and value. A "results-oriented people culture" is an important part of the brand's recent success. "Darden was always known for its exceptional career opportunities, but current management cut through the layers and bureaucracy from previous leadership that drove higher costs but arguably less success across the organization," Ivankoe said. And its relatively new CEO is a detail-oriented results-driving guru. "CEO Gene Lee is an "operator's operator," and this permeates the culture of the company through the store level," Ivankoe said.

As for food, a shake of menu items could propel a currently smaller business unit into one of Darden's best brands. "Varied menu chains combined with Darden's institutional expertise, could result in Cheddar's evolving to become Darden's second largest brand over time," Palmer thinks. Cheddar is one of several smaller subsidiaries which all combine to account for roughly 21% of Darden's revenue currently, according to its earnings release, so any upside to Cheddar could prove important to the stock. Given "Cheddar's turnaround and growth potential, we believe a low-20s P/E multiple is justified." Darden's price-to-earnings ratio is currently around 25.23, slightly above the rest of the industry's average PE multiple of roughly 21. 

Digital 

Using digital resources always helps. Darden has unlocked the ability to understand its customer base through digital insights. "With superior digital capabilities, consumer insights, marketing" Darden's relatively high valuation is justified, RBC's Palmer said. "Darden deserves a premium between casual dining peers (19x CY19E EPS)." 

"Data and insights that allows a variety of consumer benefits for products and promotions but also the operational execution around business predictability" is another area the company has blossomed in, according to Palmer. 

"A company long known for its consumer insights, we disagree with its belief that chains are taking share and in fact believe the opposite," JPMorgan's Ivankoe said. 

Branding 

Of course the first two drivers of success combine to create a great brand. Darden's focus areas may be driving solid brand strength. Anytime employees are motivated, customer service is usually solid, which drives brand strength. Of course good food is important too. Acute customers insights can also help a brand serve its customers better, thus leading to high rates of customer retention. "We continue to see upside potential from the Cheddar's brand due to favorable weather laps and Darden's demonstrated brand execution," Guggenheim analyst Matthew DiFrisco wrote in a note to clients. 

Darden is up roughly 17% this year. 

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