Deutsche Bank Initiates Coverage on Darden Restaurants (DRI) with a Hold; Valuation Holds Us on Sidelines

October 27, 2009 7:01 AM EDT

Deutsche Bank initiates coverage on Darden Restaurants (NYSE: DRI) with a Hold. Price target $30.
Deutsche analyst says, "As the leading casual dining player, Darden is well-positioned to benefit from a rebound in consumer spending and lower food costs, particularly considering the 100% company-operated business model. However, we are on the sidelines here, as somewhat attractive share valuation is offset by risk of lower returns at core concepts and slower than expected recovery in same store sales."

"We’re concerned that oversupply of casual dining restaurants and soft consumer spending will erode pricing power across the sector, as chains fight for traffic in a lower input cost environment. Our FY10/FY11 ests. for DRI are below consensus, at $2.72 vs. $2.76 for FY10 and $2.89 vs. $3.06 for FY11. We believe sales may be slower to recover than implied in consensus and guidance. Our work also suggests that low returns at Red Lobster and LongHorn (~40% of profits) raise questions about the feasibility of DRI’s LT growth targets (7-9% sales; 10-15% EPS) and even raise the risk of store closures."

To see more analyst ratings on DRI Click Here.

Darden Restaurants, Inc., through its subsidiaries, engages in the ownership and operation of full-service restaurants primarily in the United States and Canada.

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