November retail sales were exceptionally strong relative to expectations yet again. The U.S. consumer continues to spend despite being sour on the state of the overall economy according to soft sentiment surveys. Within the report, an impressive 1.6% jump in spending within the Restaurant & Bars segment helped boost the headline growth figure.
Also released last week was a strong quarter from Darden Restaurants Inc. (DRI, Financial). The valuation does not scream cheap, but solid earnings per share growth ahead, consumer resiliency and a positive momentum picture support the bulls' case.
Healthy November retail sales
Company description
Darden, together with its subsidiaries, is a full-service restaurant company that owns and operates over 1,800 locations in North America. Its largest reportable segments include Olive Garden and Longhorn Steakhouse. Its restaurant brand portfolio also includes fine dining concepts such as The Capital Grille and Eddie V's Prime Seafood. Casual dining restaurants include Bahama Breeze, Cheddar's, Seasons 52 and Yard House.
Key data
With a $19.60 billion market cap, the Florida-based restaurant company within the consumer discretionary sector trades at a near-market 18.4 forward non-GAAP price-earnings ratio and the stock pays an above-market 3.2% dividend yield as of Dec. 15. Ahead of earnings due in March, shares trade with a modest 17% implied volatility percentage, while short interest on the stock is material at 3.8%.
Color on the quarter
Earlier this month, Darden reported a healthy second quarter (the company is already in fiscal year 2024). Quarterly non-GAAP earnings of $1.84 per share came in better than the Wall Street consensus figure of $1.74 and was up significantly from $1.52 from the same period a year ago. Total sales jumped 9.7% year over year to $2.7 billion, helped by a 2.8% rise in blended same-restaurant sales along with the addition of 78 company-own Ruth's Chris Steak House restaurants (the company announced that it would acquire Ruth's Chris earlier this year).
Stable traffic trends were seen at Olive Garden, while a slight decline in traffic was reported at Longhorn. It will be key to watch labor inflation trends as well as price changes in key food areas β both will have significant impacts on total expenses and the company's margins. Additionally, Darden sees efficiencies from reduced worker turnover, artificial intelligence scheduling technologies and supply chain management improvements to offset near-term margin pressures.
Darden also repurchased approximately 1.2 million shares in the quarter for a total of $181 million. %here is ample room left for further buybacks under the current program. Going forward, the management team sees full-year sales of $11.5 billion and adjusted earnings per share of $8.75 to $8.90 versus the current consensus of $8.77.
Risks
Key risks include difficulties passing through higher costs to consumers who report being cost-conscious today. Also, macroeconomic trends will be key β any weakness in the jobs market would undoubtedly be a risk to sales and restaurant traffic trends.
Competitor analysis
Compared to its peers, Darden features a comparable set of valuation multiples β many of which are much higher compared to those seen in October, but growth is expected to improve over the periods ahead, which helps offset the questionable high-teens price-earnings ratio. Darden is among the most profitable companies in its industry, though, and share price momentum is quite strong. Earnings revisions have been very positive with the company versus its competitors given four consecutive earnings per share beats.
Valuation
On valuation, analysts at Bank of America see earnings rising by nearly 12% this year with continued low-double-digit percentage growth over the out years. The current Wall Street consensus outlook calls for $9.66 of operating earnings per share in 2025 with per-share earnings nearing $11 by fiscal 2026. Sales growth trends are decent and well above expected inflation rates, rising at a 9% clip this year and easing to 6% growth by 2026. Dividends, meanwhile, are forecast to rise steadily over the next several quarters. The company should have strong capabilities to engage in shareholder-friendly initiatives given free cash flow trends that appear healthy.
If we assume normalized non-GAAP earnings of $9.50 per share and apply an earnings multiple of 20, below its five-year average of 21.60, then shares should trade near $190, making the stock undervalued by 15% to 20%. Furthermore, investors are paid a decent yield and are rewarded with a healthy buyback program along the way.
Darden: Earnings, valuation, dividend yield and free cash flow forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed third-quarter 2024 earnings date of Thursday, March 21. Before that, shares trade expecting a $1.31 dividend on Tuesday, Jan. 9. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The technical take
Following a solid set of fiscal second-quarter results, Darden's stock price is not far from all-time highs β a feature technicians almost always like to see. Notice in the chart below that shares peaked near $173 back in July before correcting by more than 20% to a low of $133 in October. That third-quarter nadir held an important support point from late 2022 through December last year, though shares did fall significantly below the stock's long-term 200-day moving average. Last Friday's price action, while very short-term in nature, was volatile with a low of $153.51 before a strong close above $162. Traders should focus on that $153 spot for possible tactical support given that the stock's 200-day moving average also comes into play there. What's more, the move came on the highest volume since March.
Bigger picture, I like that Darden's relative strength index momentum gauge at the top of the chart shows solid buying demand over the last handful of weeks, while the 200-day moving average turns back higher after a period of consolidation. Finally, with a high amount of volume by price in the $140 to $150 zone over the last three years, there should be ample buying support on pullbacks.
Overall, Darden's chart is constructive and momentum favors the bulls. I see support in the low $150s and the low $130s, while the all-time high is in play above $170.
Shares approach all-time highs after a Q3-Q4 pullback, strong RSI
The bottom line
I see shares of Darden as attractively valued given growth prospects and improving consumer dining spend trends. Following a strong quarter, the technicals also appear constructive for higher prices in the months ahead.
