We have recently upgraded our recommendation on Darden Restaurants, Inc. (DRI) to Outperform from Neutral with a target price of $52.00.
Boasting a unique position due to its strong value proposition, menu improvements, and excellent unit-level execution with differentiated brands, Darden is one of the few casual dining operators, which expanded during the sluggish economic environment. However, it was not altogether immune having registered sagging blended comparable restaurant sales for several quarters.
But in the most recently reported quarter, blended comparable restaurant sales climbed 1.3%, the first positive growth witnessed in nearly two years, and also a substantial improvement over the declines of 4.7% and 5.3% experienced in the second and first quarters of 2010, respectively.
The comps also fared better than the 4.3% decline for the Knapp-Track benchmark of U.S. comparable restaurant sales, excluding Darden. The better-than-expected results have prompted management to raise the earnings guidance encouraged by improving sales trend and traffic.
Management said that it now expects fiscal year 2010 earnings per share to rise between 8% and 10% from $2.65 in fiscal 2009. This translates into a profit range of $2.86 to $2.92 per share for fiscal 2010. Earlier, Darden expected an earnings growth range of 5% to 8% (or $2.78 to $2.86 per share).
We remain confident about the company’s ability to deliver superior sales and cost management. Moreover, the company’s value-for-money entrées give it an edge in a competitive casual dining segment.

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