DRI - Darden Restaurants: Another Trade Following Fiscal Q1 Earnings

2023-09-21 15:43:34 ET

Summary

• Darden Restaurants, Inc. stock has returned to its previous buy point after rallying and offers an opportunity for traders to buy on the dip once again.
• The company saw growth in sales and comparable sales in fiscal Q1 2023, with Olive Garden and LongHorn Steakhouse performing well.
• Darden Restaurants offers a dividend yield of 3.5% and has a healthy forward outlook, with manageable debt and strong guidance for fiscal 2024 earnings.

Darden Restaurants, Inc. (DRI) is a stock for which we previously outlined a rather successful trade back in the spring. While the stock rallied to just a few points under the possible target, some nice gains were made, particularly those who bought the call option suggestions.

With that said, the stock has now completely round-tripped back to where we highlighted the buy. To be a successful trader, you need to take your gains when you have them. While buy and hold does work for many high quality names in the long-term, savvy investors know they can magnify their returns by trading around positions and feeding those gains to long-term positions. Right now the bearish pressure is building as there are concerns over weakening economic data, and the impact the return of student loan payments will have on families going out to eat.

However, after a 15% pull back, a chunk of this is priced in. We think you can trade again on the dip. In this column we provide another trade suggestion and update you on the just-reported fiscal Q1 earnings .

The play

• Target entry 1: $145.00-$146.00 (30% of position)
• Target entry 2: $139.00-$140.00 (33% of position)
• Target entry 3: $134.50-$135.00 (37% of position)
• Target exit: $160
• Stop loss: $117
• Estimated profit: 20%
• Options consideration: We like a call buying strategy targeting at the money strikes about 2 quarters months out.

Note from the author: This type of trade is what we lay out for our members week to week. As a matter of policy, suggestions on exact strikes and entry exit strategies, where applicable, is reserved for the investing group membership.

Let us discuss the just reported fiscal Q1.

Sales and comps rise

As we always say, increases in comparable sales are critical for restaurants and stock performance. Comparable sales are a metric we investigate closely. In fiscal Q1 2023, Darden saw growth in sales versus the prior year. The total top-line sales figure jumped 11.6% to $2.73 billion, which surpassed consensus estimates by $20 million. What about the comparable sales figure? Comparable sales for the entire company were up 5.0%. This is strong. What about in each segment?

Well, the same-store sales figure for the Olive Garden chain were up 6.1%. Leading the pack for same-store sales increases was the LongHorn Steakhouse banner, with comps rising 8.1%. However, the fine dining part of the business (such as Ruth's Chris steakhouse, Season 52, etc.), saw a 2.8% decline. Do note, however, that Ruth's Chris will not contribute to same-store sales until being operated for 16 months, so that needs to be pointed out. However, new locations are opening. Overall Darden owned restaurants increased to nearly 2,000 year-over-year, up from 1,875 a year ago. A bulk of this was 77 new Ruth's Chris owned restaurants, while every other banner saw more stores open except Seasons 52, which saw one less store open.

How about each segment's profit? Olive Garden saw profit of $262 million vs. $216 million last year. The LongHorn Steakhouse banner had segment profit of $117 million rising from $92 million a year ago. Fine dining profit also rose to $40 million, up from $30 million a year ago, while the so-called other business banners saw a $12 million increase to just over $84 million year-over-year. This was an outstanding quarter, and it comes as the company's margins have been hit from rising food and labor costs. Management used menu pricing to offset a lot of this however, and volumes have been strong. Taking revenue and operating expenses, the company registered adjusted EPS of $1.78, which was a nice beat of $0.04 against estimates and rose from $2.24 from fiscal Q1 2023.

Darden Restaurants' valuation and dividend update

With this morning's dividend announcement of $1.31 per share for the quarter, the stock now provides a 3.5% yield . We still continue to expect dividend increases in the future, and while the yield is nothing near cash or a treasury, if you plan to hold the stock a 3.5% yield is an added bonus to wait for the bounce. Do keep in mind that repurchases are ongoing with the company retiring $143 million worth of shares in the quarter. The valuation is slightly below average, although you are paying for some growth here, keep in mind. Right now, the first tranche of the play outlined above has you nabbing stock at just 17X FWD earnings. As it comes down, you can grab shares for 16X FWD earnings.

Forward look

We will reiterate that the balance sheet for Darden is pretty healthy overall, with only some slight leverage. However, leverage is up, as during the quarter the company did issue another $600 million in long-term debt to bring debt to $1.47 billion. The debt is high, but is still very manageable relative to cash flows and was needed to bring in and incorporate Ruth's Chris into the Darden banner. Total cash, cash equivalents and restricted cash was $192 million at the end of the quarter.

Now, the stock would probably be up if the market was not getting killed today, but the guidance was strong. Initially, when we first suggested a trade on this stock, we gave you an early look at our thoughts on fiscal 2024 earnings. We projected EPS of $8.50-$8.90 on sales of $11.5-$11.6 billion. The company has guided exactly within our projections! The see $8.55 to $8.85 in adjusted EPS. We still see the same sales target as likely, maybe a touch higher. With Darden Restaurants, Inc. stock taking a round trip, let it fall some more and do some tactical buying for gains.

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