Darden shares pop 6 percent on strong earnings beat, Cheddar's acquisition

Olive Garden fans and the curious line up at the Olive Garden truck in the Flatiron District in New York.
Richard Levine | Corbis | Getty Images

Shares of Darden Restaurants jumped more than 6 percent Tuesday, a day after the company posted better-than-expected fiscal third-quarter earnings and said it would buy Cheddar's Scratch Kitchen.

Cheddar's is a casual dining chain with a focus on value, and it will join Darden's portfolio, which includes Olive Garden, LongHorn Steakhouse and other brands.

The deal is Darden's first since 2012 when it bought Yard House, an upscale sports bar. It is expected to close by the end of May.

"Cheddar's is an undisputed casual dining value leader with broad appeal and strong average restaurant volumes," Darden's CEO Gene Lee said in a statement.

The chain, which was owned by private equity firms L Chatteron and Oak Investment Partners, has 165 locations in 28 states, and is expected to add to Darden's adjusted earnings for fiscal 2018 by about 12 cents per share.

"Although we have limited-to-no financial data on the company, we are familiar with it from a brand perspective and believe it is a good addition for Darden," Piper Jaffray senior analyst Nicole Miller Regan said in a research note Tuesday.

According to Darden, Cheddar's has seen revenue growth of 12 percent to 15 percent in the last 10 years.

"We feel really confident of their continued growth," said Rick Cardenas, Darden's chief financial officer, during a conference call Tuesday.

Cheddar's same-store sales were "outperforming the industry," but Lee declined to provide a more specific growth rate.

On Monday, Darden also revised its 2017 same-store sales outlook to an expected rise of 1.5 percent from a prior range of 1 percent to 2 percent.

The company expects earnings per share to be between $3.95 and $4 this year. Previously, the forecast called for earnings between $3.87 and $3.97 a share, and analysts were predicting it would earn $3.94 a share, according to FactSet.

In the third quarter, the company earned $1.32 per share on revenue of $1.88 billion. Analysts had expected earnings per share of $1.27 on revenue of $1.86 billion, according to Thomson Reuters.

"We continued to gain market share as we outperformed industry same-restaurant sales by a considerable margin again this quarter," CEO Gene Lee said in the company's earnings release.

Darden saw same-store sales, a key metric that includes only stores open at least a year, rise 0.9 percent across the board during the quarter, with Eddie V's reporting a 4.7 percent jump.

"Most impressive to us is the Olive Garden same-store-sales results, which topped our expectations with only slightly negative traffic and sizable outperformance to the industry, likely driven by continued growth in ToGo sales," BTIG analyst Peter Saleh said in a research note Monday.

During a conference call Tuesday, Darden said ToGo sales rose 17 percent in the third quarter.

Olive Garden saw same-store sales grow 1.4 percent in the third quarter, well above Street Account estimates of 0.6 percent. This is the tenth consecutive quarter of positive same-store sales for the brand.

Same-store sales at Longhorn, Capital Grille and Bahama Breeze restaurants also beat Street Account estimates. Street Account did not provide guidance for Eddie V's, Yard House and Seasons 52.