Darden Restaurants (DRI, Financial) is a premiere full-service restaurant company featuring a portfolio of category-leading brands that include Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House. Here are some reasons why the stock is interesting for the near term as well as the long term with the company having made some significant structural changes.
The first point worth mentioning is that Darden Restaurants recently completed its spinoff of select real estate and restaurant assets into Four Corners Property Trust. With the separate entity to be treated as an REIT, this is a good move for shareholders and the company’s fundamentals.
As a result of the spinoff, Darden will receive cash proceeds from Four Corners Property Trust of $315 million, and the company intends to use cash in hand to pay nearly $1.0 billion in debt. Therefore, the company’s credit profile will improve significantly as a result of this transaction.
In addition to the improvement in credit profile, strong dividends will continue with Darden Restaurants expecting a dividend of $1.75 per share post spinoff in addition to dividends of 45 cents per share coming from Four Corners Property Trust.
From the company’s business perspective, sales increased 5.7% in 1Q16 to $1.69 billion as compared to $1.6 billion in 1Q15. With same restaurant sales growth at 3.4%, the company’s chain of restaurants has been performing well. Same restaurant sales growth has remained robust in the last few quarters, and the company expects the strong performance to continue.
Another important point to mention here is that all the company’s segments (Olive Garden, Longhorn, Fine Dining and others) have witnessed positive sales growth along with robust segment profit growth. In other words, there is no particular segment that is dragging growth, and this indicates the company’s brand-pull (also indicated by continued increase in comparable restaurant sales growth).
For FY16, Darden expects comparable restaurant sales growth to be in the range of 2.0% to 2.5%, and this implies strong operating performance through FY16 along with improvement in the company’s credit health.
According to the company’s CEO, “We continue to make progress on our operating fundamentals of culinary innovation, attentive service and engaging atmospheres while continuing to focus on disciplined cost management.”
Culinary innovation has worked for Darden, and the positive impact of cost management will be visible in the company EBITDA margin. The company’s EBITDA margin for 1Q16 was 18.5%, representing an increase of 290 basis points as compared to 1Q15, and EBITDA margin improvement should continue in the foreseeable future.
With Darden estimating FY16 EPS to be in the range of $3.15 to $3.30 per share, the stock is not expensive at these levels. Considering the current stock price of $55.13, Darden is trading at FY16 PE of 17 (at mid-range of EPS guidance). Further, with deleveraging, I see higher financial flexibility and continued investment grade credit profile.
Darden has a diversified brand offering, and the company’s restaurant sales have been growing steadily. With the recent spinoff, improvement in credit profile and continued cost-cutting measures, the company’s EPS growth should remain robust. Considering the outlook for 2016 (EPS and same restaurant sales growth), Darden still has upside from current levels and can be considered at this time. With challenging times for fast-growing Chipotle Mexican Grill (CMG, Financial) considering the problems related to E coli, investors can consider switching to Darden for steady dividends and growth.
Disclosure: No positions in the stock
