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Darden Restaurants Tops Earnings Estimates, Shares Gain Over 8%

Darden Restaurants, a multi-brand restaurant operator, reported better-than-expected earnings in the third quarter, largely driven by an increase in traffic following the rollout of the COVID-19 vaccines, sending its shares up over 8% on Thursday.

The Orlando-based restaurant operator reported diluted net earnings per share from continuing operations were $0.98 per share, beating Wall Street consensus estimates of $0.70 per share. The company’s total sales decreased 26.1% to $1.73 billion, driven by negative blended same-restaurant sales of 26.7%, partially offset by the addition of 10 net new restaurants.

Darden Restaurants forecasts total sales of nearly $2.1 billion for the fourth quarter of fiscal 2021, EBITDA between $345 to $360 million and diluted net earnings per share from continuing operations of $1.60 to $1.70.

The company also declared a quarterly cash dividend of $0.88 per share and said it may repurchase up to $500 million.

Darden Restaurants shares, which rose over 9% in 2020, jumped over 8% to $144.90 on Thursday.

Analyst Comments

Darden announced third-quarter earnings that included a more modest revenue decline than we had anticipated, down 26.1% (compared with our forecast of a 30.3% decline). The rollout of COVID-19 vaccines has led to increased traffic in restaurants, which helped boost operating margins for the quarter to 8.5% versus our 7.0% estimate. Despite the improvement, fixed cost deleveraging has kept operating margins below pre-COVID-19 averages of 9%-10%,” noted Erin Lash, sector director at Morningstar.

“However, as of March 21, 99% of Darden’s restaurants were open with at least limited dining capacity, up from 80% at the end of the second quarter, and we think further improvement in sales and margins is likely in the cards. As such, we anticipate a low-single-digit increase to our $104 fair value estimate. But after a mid-single-digit rise on the print, we view shares as rich, trading more than30% above our valuation.”

Darden Restaurants Stock Price Forecast

Eighteen analysts who offered stock ratings for Darden Restaurants in the last three months forecast the average price in 12 months of $152.25 with a high forecast of $170.00 and a low forecast of $135.00.

The average price target represents a 5.07% increase from the last price of $144.90. Of those 18 analysts, 14 rated “Buy”, four rated “Hold” while none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $156 with a high of $198 under a bull scenario and $103 under the worst-case scenario. The firm gave an “Overweight” rating on the multi-brand restaurant operator’s stock.

“Results and outlook demonstrated the hoped-for sales recovery and margin expansion, with more to come in ensuing quarters. View 4Q outlook as potentially conservative and see potential margin benefits beyond the 150 bp post-COVID-19 expectations. Maintain Overweight, raise price target to $156,” noted John Glass, equity analyst at Morgan Stanley.

“Fundamentals for casual diners will likely be on a roll for the next few quarters as the reopening gains momentum and restrictions ease. We like DRI specifically because 1) it’s trading at a more modest premium vs peers, 2) it’s created more margin visibility than many others, 3) it’s a rare unit growth story, creating longevity and shareholder interest beyond the re-opening trade, 4) its strong balance sheet has allowed DRI to revisit capital returns faster than peers, some of which will need to go through a period of balance sheet repair and 5) it’s a proven share gainer with M&A optionality.”

Several other analysts have also updated their stock outlook. Truist Securities raised the price target to $158 from $150. BMO lifted the target price to $140 from $115. Stephens upped the price objective to $170 from $155. Wedbush raised the price target to $146 from $126. Evercore ISI increased the stock price forecast to $165 from $140. Cowen and company lifted the price target to $137 from $134.

Moreover, Jefferies raised the price target to $135 from $110. RBC lifted the target price to $158 from $151. CFRA upped the price target by $20 to $150. Piper Sandler increased the price target to $150 from $135. Stifel raised the price target to $140 from $120. Credit Suisse lifted the price target to $160 from $141.

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