Yahoo Finance Here's Why You Should Retain Darden Restaurants (DRI) Stock Now
Darden Restaurants, Inc. DRI is likely to benefit from new restaurant openings, the integration of Ruth's Chris Steak House and menu innovation. Also, the focus on digital efforts bodes well. However, inflationary pressures are a concern.
Let’s discuss the factors highlighting why investors should retain the stock for the time being.
Factors Driving Growth
During fiscal year 2024, Darden launched 53 new restaurants across 24 states, including eight reopenings, and successfully integrated Ruth's Chris Steak House into its operations. The company maintained its focus on reinforcing four competitive advantages and upholding operational excellence across its restaurant network, enabling it to navigate challenges such as heightened discounting and marketing pressures effectively.
In the fourth quarter of fiscal 2024, Darden completed the integration of Ruth's Chris Steak House, transitioning all company-owned restaurants to its proprietary point of sale and labor management systems. Additionally, it acquired a franchise location in Destin, Florida, achieving expected synergies with an earnings per share (EPS) accretion of $0.10. Throughout this process, the restaurant teams maintained a strong focus on enhancing guest and team member experiences, underscoring the resilience and effectiveness of Darden's strategic approach.
Going forward, DRI emphasizes enhancing guest satisfaction through core menu focus, culinary innovation, streamlining kitchen operations and improving staffing levels. These operational refinements are expected to bolster performance moving forward. Moreover, Darden has been investing in its internal digital media capabilities, testing strategies like connected television to drive traffic and leveraging insights to optimize messaging across its brands. By strategically timing communications and utilizing its digital expertise, Darden aims to maximize effectiveness without unnecessary escalation. Future plans include emphasizing specific day parts based on insights gleaned from ongoing digital testing and learning.
DRI’s valuation looks a bit undervalued compared with its industry average. Looking at the company’s forward 12-month price-to-earnings (P/E) ratio, which is one of the most commonly used valuation ratios and is best suited for evaluating restaurants — it currently has a forward 12-month P/E ratio of 16.01x. So, the stock is relatively undervalued compared with its peers, as the industry’s average P/E is currently at 22.45x.
Concerns
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Darden’s shares have declined 6.3% in the past year compared with the industry’s 5.7% fall. The downside was caused by a volatile macro environment and inflationary pressures.
In fourth-quarter fiscal 2024, total operating costs and expenses increased 7% year over year to $2.56 billion. The upside was primarily due to increased food and beverage costs, restaurant expenses and labor costs. The company is cautious about price increases in Beef. For the fiscal 2025, the company expects total inflation to be approximately 3% with commodities inflation of approximately 2% and labor inflation of nearly 4%.
Our Thoughts
Given the mixed performance metrics and external economic pressures, investors should adopt a ‘Hold’ stance on Darden stock. The company's strategic initiatives and operational strengths provide a solid foundation, but caution is warranted due to recent stock performance and cost pressures. Investors may wait for more clarity on how Darden manages these cost pressures and navigates the broader economic environment before making new investment decisions. The stock's relative undervaluation compared to peers suggests a potential upside once market conditions stabilize or strategic initiatives yield expected results.
Zacks Rank & Key Picks
Darden currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
Wingstop Inc. WING sports a Zacks Rank #1 (Strong Buy) at present. It has a trailing four-quarter negative earnings surprise of 21.4%, on average. The stock has surged 113.7% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for WING’s 2024 sales and EPS suggests a rise of 27.9% and 37.1%, respectively, from year-ago levels.
Brinker International, Inc. EAT currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 213.4%, on average. EAT’s shares have risen 107.2% in the past year.
The Zacks Consensus Estimate for EAT’s 2024 sales and EPS indicates 5.1% and 42.1% growth, respectively, from the year-earlier actuals.
El Pollo Loco Holdings, Inc. LOCO currently carries a Zacks Rank #2. It has a trailing four-quarter earnings surprise of 19.4%, on average. LOCO’s shares have risen 21.7% in the past year.
The Zacks Consensus Estimate for LOCO’s 2025 sales and EPS indicates 3.8% and 9.9% growth, respectively, from prior-year figures.
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Darden Restaurants, Inc. (DRI) : Free Stock Analysis Report
Brinker International, Inc. (EAT) : Free Stock Analysis Report
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Wingstop Inc. (WING) : Free Stock Analysis Report
