Sun. Jul 14th, 2024

‘We downgrade Darden stock on weaker near-term fundamentals’

Jul 11, 2024



On Thursday, Darden Restaurants (NYSE:) stock experienced a downgrade in rating by Jefferies from Hold to Underperform. The firm also reduced the price target for the company’s shares to $124 from the previous $154. The action comes amid concerns about the company’s near-term fundamentals.

The downgrade is attributed to several factors that could potentially affect Darden’s performance. Jefferies pointed out the risk of market share loss in an increasingly promotional environment, persistent weakness at the low end of the market, and diminishing benefits from the pandemic’s impact on industry capacity.

Jefferies believes that Darden may see a continued narrowing in same-store sales (SSS) and traffic compared to its peers. This could lead to a contraction of the premium multiple that Darden’s stock has historically enjoyed.

Currently, Darden’s shares trade at approximately 9 times earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to the industry peer average of around 7 times.

The price target adjustment reflects these concerns, with the new target of $124 representing a notable decrease from the previous $154 target. This new price target suggests that Jefferies has a more cautious outlook on Darden’s stock value going forward.

Darden Restaurants, known for its portfolio of brands that includes Olive Garden and LongHorn Steakhouse, has yet to respond publicly to the downgrade and revised price target. Investors and market watchers will be observing the company’s performance in relation to the issues raised by Jefferies.

In other recent news, Lennar Corporation (NYSE:) has been downgraded from a Buy rating to Neutral by Citi, which also reduced its price target to $164 from $174. This shift reflects a cautious outlook on the housing market, with Citi analysts noting a softening in housing activity.

Additionally, expectations of decreased earnings per share for fiscal year 2024 have led to a projected 3% cut, with estimates for fiscal years 2025 and 2026 also slightly lower.

In recent developments, Darden Restaurants, Inc. reported an 8.6% surge in total sales to $11.4 billion for fiscal year 2024 and an adjusted diluted net earnings per share of $8.88, exceeding expectations.

The company’s success is largely attributed to effective cost management and the successful integration of Ruth’s Chris Steak House. However, Olive Garden, a Darden brand, experienced negative same restaurant sales despite outperforming industry benchmarks in guest counts.

Looking forward, Darden’s outlook for fiscal year 2025 includes a guidance range of 1% to 2% for same-restaurant sales growth and a total sales growth driven by same restaurant sales and new restaurant growth.

The company also anticipates modest pricing in line with inflation, with a blended price increase of 2.5% to 3% for FY 2025. These recent developments underscore Darden’s resilience and adaptability in a challenging environment, with a strong focus on guest satisfaction and strategic cost management.

InvestingPro Insights

In light of Jefferies’ recent downgrade of Darden Restaurants (NYSE:DRI), a look at the InvestingPro data and tips may provide additional context for investors. Darden’s market capitalization stands at $16.45 billion, with a P/E ratio of 16.03, indicating a valuation that is relatively high compared to near-term earnings growth. The company’s revenue for the last twelve months as of Q4 2024 was $11.39 billion, demonstrating a healthy growth rate of 8.6%.

From an investment standpoint, Darden has a track record of increasing its dividend, doing so for 30 consecutive years, which could be appealing to income-focused investors. Additionally, the stock’s RSI suggests it is in oversold territory, potentially indicating a buying opportunity for value investors. However, it’s worth noting that 15 analysts have revised their earnings estimates downwards for the upcoming period, which could signal caution.

For those considering Darden Restaurants as an investment, there are more InvestingPro Tips available, such as the company’s trading patterns and liquidity concerns. In total, there are 11 additional tips listed on InvestingPro for Darden Restaurants, which can be accessed at https://www.investing.com/pro/DRI. To delve deeper into these insights, use coupon code PRONEWS24 for up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, providing a more comprehensive investment analysis.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.





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