Investors have given Darden Restaurants shares a five-star rating.
The owner of chains including Olive Garden and Longhorn Steakhouse was the biggest gainer on the S&P 500 on Tuesday after the company said it acquired Cheddar’s Scratch Kitchen and lifted its full-year earnings outlook.
Shares in the Florida-based company surged nearly 9 per cent to $82.10 — on track for their best day since March 2009 – taking the year-to-date advance to 13 per cent.
The rally came as Darden acquired privately owned Cheddar’s Scratch Kitchen for $780mn from shareholders including L Catterton and Oak Investment Partners in an all-cash deal. Darden expects between $20m and $25m in pre-tax savings by fiscal 2019. It also expects the deal to add about 12 cents to diluted net earnings per share in fiscal 2018.
The transaction gives Darden “a new growth vehicle, which is needed given limited aggregate unit growth in the current portfolio,” according to Jason West, an analyst at Credit Suisse. He did however note that this was a “steep price to pay”.
The company also lifted its full-year earnings outlook to a range of $3.95 to $4 a share, from between $3.87 to $3.97 previously. Darden’s outlook for like-for-like sales, a key industry metric was updated to 1.5 per cent, the mid-point of its previous guidance for 1 to 2 per cent.
The upbeat outlook accompanied a rise in profits to $165.6m or $1.32 a share in the fiscal third quarter — above analysts’ estimates — from $105.8m or 82 cents a share in the year ago period.
Meanwhile sales rose 1.7 per cent to $1.88bn a touch above estimates, while comparable store sales climbed 0.9 per cent, above estimates of 0.3 per cent.