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Off-Premise Business Model Aids Darden (DRI), High Costs Ail

Darden Restaurants, Inc. DRI will likely benefit from the off-premise business model, technological enhancements and Cheddar’s business. Also, the emphasis on the Back-to-Basics initiative bodes well. However, a decline in traffic (from pre-pandemic levels) and inflationary pressures are a concern.

Let’s discuss the factors highlighting why investors should retain the stock for the time being.

Factors Driving Growth

Darden continues to benefit from its robust off-premise sales. During first-quarter fiscal 2023, off-premise sales contributed more than 24% to total sales at Olive Garden, 14% at LongHorn and 13% at Cheddar's Scratch Kitchen. The company has been benefiting from technological enhancements regarding online ordering and To Go capacity management. Given the solid feedback on account of enhanced customer experience and reduced friction, the company expects off-premise sales to remain high for some time.

To reduce friction and enhance consumers’ convenience in the digital platform, Darden initiated streamlining the order pickup process and payment methods. Backed by these initiatives, online ordering increased sharply. It is also witnessing a sharp increase in To Go sales. During first-quarter fiscal 2023, 62% of all off-premise sales were placed digitally. The improvements in the business model are likely to reinforce its ability to boost restaurant value across its brands.

Darden’s acquisition of the small restaurant chain, Cheddar's Scratch Kitchen (Cheddar's), in April 2017 added an undisputed casual dining value to its portfolio of differentiated brands. The acquisition also helped Darden enhance its scale. Management made significant operational readjustments to the brand, which is expected to reap long-term benefits. Apart from making progress with integrating Cheddar’s, the company seems to gain more confidence in its outcome. The company considers that Cheddar has significant prospects for long-term growth. Also, it added that it anticipates restaurant-level margins to be well in the high teens when Cheddar’s reaches 100% of the pre-COVID sales. For fiscal 2023, the company anticipates a year-over-year increase in Cheddar restaurant openings.

The company emphasizes on Back-to-Basics operating philosophy to drive growth. This involves a focus on culinary innovation and execution, attentive service, guest engagement and integrated marketing efforts. It is also working to simplify kitchen systems, improve staffing levels and operational excellence to enhance the guest experience, enable menu customizations and make smarter promotional investments. The operational readjustments are likely to drive the company’s performance in the future.

Concerns

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Shares of Darden have declined 19.6% so far this year compared with the industry’s 17.9% fall. The dismal performance was primarily caused by the coronavirus crisis. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.

The company has been persistently shouldering increased expenses, which are denting margins. In the fiscal first quarter, total operating costs and expenses increased 8.7% year over year to $2,201.9 million. This escalation was primarily due to a rise in food and beverage costs (driven by commodities inflation of 15%), restaurant expenses (owing to supply chain challenges and utilities inflation of 16%) and labor costs (owing to labor inflation of 7.5%). For fiscal 2023, the company expects total inflation of 6%, commodities inflation of approximately 7% and total restaurant labor inflation of 8%, including hourly wage inflation.

Zacks Rank & Key Picks

Darden currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Tecnoglass Inc. TGLS, Cracker Barrel Old Country Store, Inc. CBRL and Potbelly Corporation PBPB.

Tecnoglass sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 24.4%, on average. Shares of the company have increased 10.2% in the past three months.

The Zacks Consensus Estimate for Tecnoglass 2022 sales and earnings per share (EPS) suggests growth of 28.2% and 47.7%, respectively, from the year-ago period’s levels.

Cracker Barrel carries a Zacks Rank #2 (Buy). Cracker Barrel has a long-term earnings growth of 6.9%. Shares of the company have increased 14.2% in the past three months.

The Zacks Consensus Estimate for Cracker Barrel’s 2022 sales and EPS suggests growth of 16.3% and 15.4%, respectively, from the year-ago period’s levels.

Potbelly carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 22.2%, on average. Shares of the company have declined 18.8% in the past three months.

The Zacks Consensus Estimate for Potbelly’s 2022 sales and EPS suggests growth of 17.5% and 100%, respectively, from the year-ago period’s levels.


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