• Darden Restaurants International is tightly held by the institutions. 
• The company also has the support of the analyst community.
• Darden's FQ1 results were exactly as expected and have shares pulling back to more attractive levels

Darden Restaurant International (NYSE: DRI) boasts a high 90% institutional ownership and the institutions are holding on to the shares. Not only has the total institutional activity fallen to low levels from its peak two years ago but the net of activity is bullish for the past 12 months and the worst that can be said is it smacks of rotation. The takeaway is this situation is unlikely to change following the FQ1 earnings report so any price weakness that may develop should be viewed as a potential buying opportunity for institutions.

And the analysts are holding on to the name too and have it pegged as a Moderate Buy. The company received a string of positive commentary ahead of the report that included several newly initiated coverages and a few price target increases. The salient point here is the price target has come down from its high set a year ago but it has firmed considerably in the last 30 days and that trend should continue now. The stock is trading at a relatively high valuation compared to the broad S&P 500 but still, it offers steady growth and a healthy 3.7% dividend yield, as well as a potential for at least 10% of share price increase too. And all that in the face of slowing global economic activity, inflation, and rising interest rates. 

Darden Slips On Tepid Results 

Darden Restaurant International lived up to the expectations for FQ1 and nothing more. The revenue of $2.45 billion came in $0.02 shy of consensus or about 80 basis points while the bottom line $1.56in GAAP EPS is exactly as expected. The top-line result is 6.1% better than last year and a quarterly record driven by comp store growth in all channels coupled with price increases and a higher store count. On a comp basis, sales are up 4.2% and aided by 34 net new stores. 

Moving on to the margin and earnings, the company experienced double-digit inflation versus last year but was able to offset a large part of the increase. The operating margin contracted but only by 218 basis points which were less than expected. This left the GAAP earnings at $1.56 or in line with the expectations and allowed the company to reiterate all portions of its full-year guidance. The company is still expecting revenue and earnings to bracket the consensus figures with ample room for upside surprises later in the year. 

Darden Restaurants Capital Returns Are Attractive 

The company is experiencing margin pressure but is still generating healthy cash flow and more than enough to sustain the dividend and share repurchases. The stock is yielding about 3.7% with shares trading near $125.75 and there is a positive outlook for distribution growth too. The company has been increasing for the last 3 years after cutting the payment during the pandemic but it has, pandemic aside, been a steady dividend increaser for nearly 15 years and there is room for additional increases in the numbers. As for share repurchases, the company bought back about $200 million worth of shares during the quarter and still has more than $900 million left under the current authorization. That’s worth about 5.5% of the market cap. 

The Technical Outlook: Darden Restaurants Pulls Back To Support 

The price action in Darden Restaurants started pulling back even before the Q1 results were released and they are extending the move in the wake of the report. The move confirms resistance at the top of a trading range and has the price headed down toward a support target near $123. If the $123 level can hold up as support the market may move sideways from there or even drift higher. If not, this stock could easily move down to the $112 to $116 region where it would be an even more attractive stock to buy.