We remain bearish on the Casual dining names and moving DRI up on the SHORT list.
DRI has outperformed the Casual dining peer group by a significant margin over the past three months. DRI is up 2.9% over the past three months, versus the Casual Dining group down 21%. The stock is the most expensive in Casual Dining, trading at 15x NTM EV/EBITDA and a group at 11x. The short-interest has crept up lately to 3.05% but down from 5.8% a years ago. The company last updated the financial community in late June before the increase in COVID cases, and others warned about inflation pressures. DRI assumes a total operating capacity for all restaurants and does not anticipate any significant business interruptions related to COVID-19. Based on that, guidance is for total sales of $9.2 billion to $9.5 billion, representing growth of 5% to 8% from pre-COVID levels; same-restaurant sales growth of 25% to 29% and 35 to 40 new restaurants; capital spending of $375 million to $425 million; total inflation of approximately 3%, with commodities inflation of approximately 2.5% and hourly labor inflation of approximately 6%; EBITDA of $1.5 billion to $1.59 billion; an annual effective tax rate of 13% to 14%; and approximately 131 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $7.00 and $7.50. The current environment suggests that estimates are not likely to move higher than the current consensus and could head lower on slowing sales and increased costs.
INDUSTRY SALES TRENDS
While the industry posted its 19th consecutive week of same-store sales growth, performance dropped and was the worst weekly results in the last five weeks. COVID has re-emerged as a big concern for the industry, as cases begin trending up again and the Delta variant captures the headlines. But, so far, the effect on restaurant sales seems to be minimal, but it's early to call it a non-event. Eleven states had lower same-store sales growth during the week compared to their average growth reported for all of June. Wyoming, Maine, Nevada, Arizona, and Arkansas experienced a 2.0%+ decline in same-store sales growth. However, all but Wyoming still managed to post positive same-store sales growth. Sales growth remained at +7.0% or better for 8 of those states, highlighting the strength of the industry's performance. Despite being a COVID hotspot in recent weeks, Arkansas continues to post double-digit restaurant sales growth. So far, there seems to be a slowdown because of the new wave of COVID cases, but not a sharp drop in sales. The recent surge in COVID cases seems to be fueling another acceleration in off-premise sales growth. For limited-service, growth in off-premise sales is the strongest they have been in the last six weeks. In full-service, off-premise sales growth is also trending up again for the last four weeks, which is a positive for DASH.
