Darden Restaurants' Q3 Triggers Sell-Side Upgrade

Darden Restaurants, Inc. (NYSE: DRI), the restaurant operator best known for its Olive Garden and LongHorn Steakhouse chains, reported fiscal third-quarter results Thursday that prompted Stephens to turn bullish on the stock.

The Analyst

Stephens' Will Slabaugh upgraded Darden Restaurants' stock rating from Equal-Weight to Overweight with a price target lifted from $95 to $105.

The Thesis

Darden's Q3 reaffirmed that the company is outperforming the overall restaurant industry, Slabaugh said in a Monday note.

Olive Garden's streak of positive same-store sales growth now stands at 14 consecutive quarters, and the growth was driven by a 0.1-percent traffic gain and a 1.7-percent pricing increase, the analyst said.

Customers are responding well to the Italian-American restaurant chain's everyday value offering, to-go ordering and overall menu simplification, Slabaugh said. 

Longhorn posted 2-percent same-store sales growth, which did fall short of the 3.5 percent Stephens had projected. Nevertheless, it's LongHorn's 20th consecutive quarter of positive same-store sales growth from ongoing penetration in new markets and an overall focus on guest experience, Slabaugh said. 

Darden shares are trading at 16.2x CY18 EPS and 14.9x CY19 EPS — which is a below-market multiple for a restaurant operator whose top brands are expected to post consistent 2-percent same-store sales growth, the analyst said. Darden as a whole is likely to issue beat-and-raise earnings reports moving forward, which should prompt the stock to "regain its premium valuation," he said. 

Price Action

Shares of Darden Restaurants were up 2 percent after the open Monday. 

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