Why Darden Restaurants Still Packs A Punch Despite Slower Comps: Analyst Lowers Price Target But Keeps Outperform Rating

Raymond James analyst Brian Vaccaro reiterated an Outperform rating on the shares of Darden Restaurants Inc DRI and lowered the price target from $175 to $165.

The analyst expects F1Q24 adjusted EPS of $1.74 versus $1.56, $0.03 above consensus. F1Q revenue is expected to be $2.71 billion (+10.8% y/y), reflecting blended comps +4.3% and ~10 weeks of Ruth’s Chris revenue.

Store margins are expected to increase 70 basis points y/y to 18.0%, reflecting lower COGS partially offset by slightly higher labor, Other Opex, and marketing costs.

Never Ending Pasta (NEP) is starting one week earlier than last year and will be available for 8 weeks (9 weeks for e-club) this year compared to 7 weeks in 2022, noted the analyst.

This, according to the analyst, should benefit OG y/y comps in 2H September and seems consistent with a broader increase in industry promotional activity.

The analyst expects management to acknowledge softer segment comps over the last few weeks, but believe OG/LH can sustain solid relative outperformance.

Also on commodities, while the analyst continues to expect significant y/y COGS leverage in F1Q/2Q, higher spot chicken and dairy prices could result in some incremental pressure moving into CY24.

DRI shares are down ~7% in the past month and ~12% off their July highs as investor sentiment shifted more negative through August as comps softened, observed the analyst.

The analyst believes the stock can relatively outperform if a softer comp environment persists, given its strong brand portfolio, advertising dry powder, best-in-class ops, and strong balance sheet.

The analyst has lowered the price target to $165 in light of the slower industry comp environment, which equates to ~18x CY24 EPS estimate.

Price Action: DRI shares are trading higher by 1.85% at $151.57 on the last check Thursday.