# Olive Garden parent takes a COVID-related hit in key markets but here’s why analysts are upbeat

Darden
DRI,
-0.80%
reported fiscal first-quarter sales of $1.53 billion, down from $2.13 billion last year and just below the FactSet consensus for $1.56 billion. Olive Garden same-restaurant sales were down 21.1%. Sales at Olive Garden were down 27.7% to $788.2 million, sales at Longhorn Steakhouse fell 16.3% to $376.8 million, and fine dining sales sank 38.9% to $83.1 million.

“Overall, capacity restrictions continue to limit their top-line sales, particularly in key high-volume markets like California and New Jersey where dining rooms were closed for the majority of the quarter,” said Chief Executive Eugene Lee on the earnings call, according to FactSet.

Read: Beyond Meat, Incogmeato, Impossible Foods up ante in plant-based meat market

Lee notes that Olive Garden has 100 restaurants in California alone. Overall, what’s going to make a difference to same-restaurant sales in the near future will be increased capacity.

“We need to get California back,” Lee said. “We need some
other areas to increase their capacity from 25% to 50%. Once you get past 50%,
as long as the six-foot rule is in place, you’re still not going to really be
able to max out your dining rooms.”

Even getting the bar area back in certain area is an
improvement, he said.

The “best” Olive Garden in the company’s lineup, the Times Square location in New York City, is a $15 million location, Lee said. Now that restaurant is only pulling in $2,500 per day.

On Sept. 30, indoor restaurant capacity up to 25% will be allowed.

“[T]his is going to probably be hard for you to believe but
we have one restaurant that cost us 50 basis points in comps. That’s the Times
Square Olive Garden,” said Lee. “You wake up every day and you’re $300,000
short just in that one restaurant.”

Still, Darden shares closed up 8.1% on Thursday. The stock is down 11.3% for the year to date while the S&P 500 index
SPX,
+0.33%
has edged up 0.8% for the period.

“Like many restaurant companies, Darden has used the pandemic as an opportunity to reset its cost structure, streamline operational processes, and eliminate unpopular items from the menu,” writes KeyBanc Capital Markets analysts led by Eric Gonzalez.

See: Kraft Heinz stock upgraded twice with analysts upbeat about ongoing business transformation

“While capacity limitations might mean Olive Garden’s sales
recovery lags the industry, Darden’s cost-cutting measures continue to
outperform expectations, and we see a more favorable margin structure in the
future.”

KeyBanc rates Darden stock overweight with a price target of
$108, up from $102.

Darden’s Chief Financial Officer Ricardo Cardenas said on
the call that streamlining the menu “more than offset” the cost of additional
to-go packaging.

A number of research groups raised Darden’s price target, including MKM Partners (to $115 from $110) and Truist Securities (to $128 from $100). Both analyst groups rate Darden stock buy.

Don’t miss: Chipotle brings back carne asada for a limited time

RBC Capital Markets rates Darden stock outperform with a
$107 price target, up from $97.

“Although Darden’s valuation premium to casual dining peers
suggests limited upside, we view the consistency of its top brands and its
relative position of strength in an overall challenging casual dining
environment as supportive of our expectations of continued share
outperformance,” analysts said.