Why Darden's Turnaround Story Is Now 'More Compelling'

• Darden Restaurants, Inc. DRI shares are down 10 percent since July 20, after having hit a high of $74.91 on August 5.
• Maxim Group’s Stephen Anderson upgraded the rating on the company from Hold to Buy, while maintaining the price target at $80.
• Anderson believes that consistently positive same-restaurant sales growth would be the most important catalyst for the shares over the next few quarters.

Analyst Stephen Anderson expects Darden Restaurants to generate company-wide comps of 2.5-3.5 percent through FY17. He expects this to be driven by a continued sales turnaround at Darden Restaurants’ latest Olive Garden concept and mid-single-digit comp growth at the company’s other concepts.

There is as much as 100 bps upside to Olive Garden’s longer-term comp growth goal of 1-2 percent from transaction growth and changes to menu mix.

“We also continue to model mid-single-digit comp growth at LongHorn, which has differentiated itself with its focus on culinary innovation, as well as at SRG, which we see benefiting from positive domestic business travel and demographic trends,” Anderson wrote.

The analyst believes that “consistently positive same-restaurant sales growth” would be Darden Restaurants’ most important catalyst in the next few quarters. He added that the company’s ability to control costs is “the next most important catalyst.”

Anderson mentioned that the REIT spinoff is likely to happen. Even if this is blocked by a recent IRS ruling, Darden Restaurants has other options to unlock asset value.

Although the company’s shares have declined in recent weeks, there appears to be no change to “what we believe remain solid fundamentals,” the Maxim Group report stated. Anderson believes that the turnaround thesis is now more compelling after the recent pullback in shares.