Should you buy the dip?
While popular restaurants Olive Garden and LongHorn Steakhouse enjoyed strong revenue gains in the latest quarter, the stock price of its parent company, Darden Restaurants (NYSE:DRI) was down about 7% on Thursday.
The reason is primarily due to Darden missing earnings estimates in its fiscal first quarter.
- Revenue: $3.04 billion, up 10% year-over-year, and in line with estimates.
- Net income: $258 million, up 25% year-over-year
- Earnings: $2.19 per share, up 26% year-over-year.
- Adjusted earnings from continuing operations: $1.97 per share, up 12.5%, but below estimates of $2.00 per share.
The reaction from investors seemed a little harsh, given the fact that Darden posted strong growth numbers in a challenging environment. The recent retail sales report from the U.S. Census Bureau showed that restaurant sales were only up 0.7% in August and 5.5% year-over-year. Darden exceeded both of those numbers.
Olive Garden and LongHorn see hearty sales
Darden’s two main restaurant chains, Olive Garden and LongHorn Steakhouse, performed particularly well.
- Olive Garden sales grew 7% year-over-year to $1.3 billion
- LongHorn Steakhouse sales rose 9% year-over-year to $776 million.
- Fine dining revenue increased 2% to $286 million.
- Other segment jumped 23% to $681 million.
The other segment benefited mainly from the addition of Chuy’s restaurant, and its 108 locations, to the company. Olive Garden is the largest with 933 restaurants, followed by LongHorn with 595, and Cheddar’s Scratch Kitchen with 182.
- Olive Garden: 933
- LongHorn Steakhouse: 595
- Cheddar’s Scratch Kitchen: 182
- Chuy’s: 108
- Yard House: 89
- Ruth’s Chris Steak House: 82
- The Capital Grille: 73
- Seasons 52: 43
- Eddie V’s: 29
- Bahama Breeze: 28
- The Capital Burger: 3
Overall, Darden added 125 new restaurants across its portfolio in the quarter, compared to Q1 of the previous fiscal year. This certainly added to the revenue gains. But a better indicator is same-restaurant sales, which were strong.
- Olive Garden: Same restaurant sales up 5.9%
- LongHorn Steakhouse: Same restaurant sales up 5.5%
- Fine dining: Same restaurant sales down 0.2%
- Other: Same restaurant sales up 3.3%
Buy the dip?
Darden also raised its sales guidance for the full fiscal year, boosting it to 7.5% to 8.5% growth, up from the previous guidance of 7% to 8%.
Same-restaurant growth remains the same at 2.5% to 3% growth, as does adjusted earnings of $10.50 per share to $10.70 per share. This is roughly in line with analysts’ expectations.
The sizable selloff does not seem to make a ton of sense, given the solid results and outlook. The stock is also reasonably valued, so it is likely not a case of being concerned that the stock overvalued. The selloff seems mostly tied to the slight earnings miss, even though results were fairly strong.
Darden stock has a median price target of $237 per share, which would suggest 23% upside. Today’s selloff is a good opportunity to sniff around Darden stock for a potential good value.
