Darden May Be Right To Sacrifice Some Profit To Maintain Price Advantage

Despite a solid top-line performance, Darden Restaurants, Inc. (NYSE: DRI) reported its FY4Q16 EPS merely $0.01 ahead of the consensus estimate. BMO Capital Markets’ Andrew Strelzik maintained a Market Perform rating for the company, while reducing the price target from $66 to $64.

Darden Restaurants reported its EPS at $1.10, only slightly beating the consensus estimate due to weaker margins. The company announced its FY17 EPS guidance at $3.80-$3.90, below consensus of $3.98. “DRI’s FY17 guidance was the bigger surprise in the context of both recent business performance and its long-term algorithm,” analyst Andrew Strelzik wrote.

Darden Restaurants’ guidance seems to reflect a “redoubling of DRI’s efforts to maintain its comprehensive value advantage over the competitive set,” Strelzik mentioned. He added that the company intends to do this through more limited pricing and reinvestment of cost savings in food and service enhancements.

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Strategy Appropriate

Although increased reinvestment is limiting upside potential for Darden Restaurants’ EPS, while sluggish industry same-store sales trends have created some uncertainty, the company’s decision to increase reinvestment is encouraging and is needed to sustain same-store sales outperformance, since several peers are “increasingly adopting more focused comprehensive value strategies,” the analyst commented.

Moreover, DRI’s Darden Restaurants’ strategies continue to be attractive “in terms of simplification, unleashing the potential of off-premise sales, and better targeting customers through innovation/marketing optimization,” Strelzik noted. Also, there could be opportunities to increasingly deploy the company’s strong FCF given its relatively low leverage.