Darden (DRI) Strong on Sales Initiatives Amid Rising Costs

Darden Restaurants, Inc. DRI is poised to benefit from its sales-building initiatives and technology-driven moves. Moreover, robust performance by Olive Garden and LongHorn Steakhouse segments added to the upside. However, stiff competition, rising costs and a lower-than-expected top line are concerning. Let’s delve deeper.

Growth Drivers

Darden Restaurants strives to attract guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on its marketing strategy to improve execution; customer relationship management and digital advertising as well as a strong promotional pipeline that leverage the LongHorn’s expertise. Further, the company continues to focus on strengthening its in-restaurant execution through investments in quality and simplification of operations in order to augment guest experience. Owing to these efforts, segmental comps at LongHorn registered growth for 27 consecutive quarters.

Also, robust performance by the Olive Garden brand continues to drive performance. In second-quarter fiscal 2020, Olive Garden's off-premise business improved 17% and accounted for 17% of total sales. Moreover, second-quarter fiscal 2020 marked Olive Garden’s 21st consecutive quarter of positive comps. Meanwhile, the company is focusing on technology-driven initiatives like the system-wide rollout of tablets in order to capitalize on digitization, which has rapidly penetrated the U.S. fast-casual restaurant sector. This initiative has been boosting the company’s sales over the past few quarters.

Meanwhile, the company, which shares space with Cracker Barrel Old Country Store, Inc. CBRL, Texas Roadhouse, Inc. TXRH and Bloomin' Brands, Inc. BLMN, is focusing on an aggressive cost management plan.

Concerns

The company’s increase in operating costs is concerning. Total operating costs and expenses increased 4.8% year over year in fiscal 2019. Moreover, in the fiscal second quarter, total operating costs and expenses increased 3.9% year over year, following a rise of 3.2% in the preceding quarter. The upside can be attributed to an overall increase in food and beverage costs, restaurant expenses and labor costs. Increase in expenses might hurt the company’s margin in the coming quarters.

Also, the company’s lower-than-expected top-line performance is concerning. Revenues have missed estimates in four of the trailing five quarters. In second-quarter fiscal 2020, total sales of $2,056.4 million lagged the consensus mark of $2,058 million.

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