Darden (DRI) Gains 26% in 6 Months: What's Driving the Stock?

In an intensely competitive restaurant industry, Darden Restaurants, Inc. DRI has performed exceedingly well and emerged as an attractive investment option. Shares of the company have surged 25.9% in the past six months, outperforming the industry’s 4.8% growth.

We believe there is still momentum left in this Zacks Rank #2 (Buy) stock, which is quite evident from upward estimate revisions of 11 cents to $5.61 per share over the past 30 days. The company also has a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks such as Dunkin' Brands Group, Inc. DNKN, Restaurant Brands International Inc. QSR and Del Taco Restaurants, Inc. TACO, which belong to the same industry, have also gained 19.3%, 2.9% and 8%, respectively, in the past six months. Let’s delve deeper and find out the reason that kept Darden ahead of its peers.

Key Catalysts

Impressive Earnings Surprise History

The sharp increase in share price over the past six months can primarily be attributed to robust earnings surprise history. In fact, Darden’s earnings surpassed the Zacks Consensus Estimate for 15 straight quarters. Earnings estimates for the current fiscal have also climbed 1.5% in a month’s time, reflecting analysts’ optimism surrounding the company’s earnings potential.

Given management’s progress on improving core operating fundamentals along with the Cheddar's acquisition, the stock is anticipated to keep performing well in the quarters ahead.

Cheddar's Acquisition – A Bright Spot

Darden’s Cheddar's Scratch Kitchen (Cheddar's) acquisition in April 2017 has added an undisputed casual dining value to the company’s portfolio of differentiated brands. It also helped Darden to further expand its scale. In the first quarter of fiscal 2019, Cheddar’s total sales increased 6.5% driven by organic new restaurant growth and franchise restaurant acquisition growth of 10.5%. Further, sales at the other business segment grew 7.1% in the reported quarter, backed by new net restaurants and the purchase of 11 Cheddar's franchise restaurants in the second quarter of fiscal 2018.

Apart from progressing well with the integration of Cheddar’s, the company seems to very confident about its outcome. In fiscal 2018, management realized roughly $10 million of cost synergies and expects to generate the same in the range of $22-$27 million by the end of fiscal 2019.

Olive Garden Brand Continues to Deliver Solid Results

In order to boost Olive Garden brand’s performance, the company implemented a set of initiatives under its Brand Renaissance Plan. These included simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, developing new core menu items, allowing customization and making smarter promotional investments. Supported by these initiatives, Olive Garden posted the 16th consecutive quarter of positive comps in first-quarter fiscal 2019.

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