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Why Darden Restaurants, Inc. Stock Jumped Today

By Jeremy Bowman - Updated Mar 28, 2017 at 1:01PM

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The Olive Garden-parent popped up after an impressive earnings report and news of an acquisition.

What happened

Shares of Darden Restaurants, Inc. (DRI -0.87%) were looking tasty to investors on Tuesday as the Olive Garden-parent surged after a strong third-quarter earnings report and on news that it would acquire casual-dining chain Cheddar's Scratch Kitchen.

As of 11:51 a.m. EDT, the stock was up 8.3%.

A woman standing behind the counter at Olive Garden.

Image source: Olive Garden.

So what

Darden, which also owns Capital Grille and Longhorn Steakhouse, among other chains, said comparable sales were up companywide by 0.9% and increased 1.4% at Olive Garden, a respectable result at a time when many restaurant chains have been seeing sales at established stores fall.

Overall revenue ticked up 1.7% to $1.88 billion, beating estimates of $1.86 billion. On the bottom line, adjusted earnings per share increased 9.1% to $1.32, ahead of the consensus at $1.27.

The market also seem pleased with the company's move to acquire Cheddar's in an all-cash acquisition for $780 million. The deal comes two years after Darden sold Red Lobster for $2.1 billion. With Cheddar's, the restaurant parent gains 165 locations under its umbrella, growing its base by about 10% and making Cheddar's the company's third-largest chain. Management said it expected the deal to be accretive to next year's EPS by $0.12.

Now what

Darden also lifted its full-year EPS forecast to $3.95-$4, up from a previous range of $3.87-$3.97, and said it expected full-year comparable sales growth of 1.5%.

Shares of the casual dining company have been on a roll recently as the stock has increased 25% over the past year. For a slow growth company, the P/E valuation may be getting stretched at more than 20 based on this year's earnings, but the Cheddar's acquisition suggests management is interested in expansion once again.

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