Darden leaps after earnings boost and acquisition

Darden Restaurants was one of the biggest gainers on the S&P 500 with shares on track for their best day in eight years after the company said it acquired Cheddar’s Scratch Kitchen and lifted its full-year earnings outlook.

Shares in the Florida-based company surged 8.4 per cent to $81.96, taking the year-to-date advance to 12.7 per cent.

The rally came as Darden acquired privately owned Cheddar’s Scratch Kitchen for $780m from shareholders including L Catterton and Oak Investment Partners in an all-cash deal.

The transaction gives Darden “a new growth vehicle, which is needed given limited aggregate unit growth in the current portfolio”, according to Jason West, an analyst at Credit Suisse. He did, however, note that this was a “steep price to pay”.

The company also lifted its full-year earnings outlook to a range of $3.95 to $4 a share, from between $3.87 to $3.97 previously.

Darden’s outlook for like-for-like sales — a key industry metric — was updated to 1.5 per cent, the midpoint of its previous guidance for 1 to 2 per cent.

The upbeat outlook accompanied a rise in profits to $165.6m or $1.32 a share in the fiscal third quarter — above analysts’ estimates — from $105.8m or 82 cents a share in the year-ago period.

Meanwhile, sales rose 1.7 per cent to $1.88bn — a touch above estimates — while comparable store sales climbed 0.9 per cent, above estimates of 0.3 per cent.

Elsewhere, open source software company Red Hat saw its biggest gain in two years, following positive quarterly results released on Monday evening.

Shares in the company rose 5.8 per cent to $86.91, on course for a new record close.

It takes the company’s year to date advance to nearly 25 per cent, having recovered from a dramatic 13.9 per cent fall at the end of the year off the back of disappointing third-quarter results.

The company has built its business by taking the open-source operating system Linux and offering companies greater protection and stability so that it can be used on a larger scale.

The concern in the third quarter was that this business might be slowing down without other products picking up slack.

But revenue in the fourth quarter for the company was $629m, beating analyst estimates, while the company’s adjusted earnings per share of $0.61 was up from $0.52 last year.

Analysts took particular note of the strong deal volume for the quarter. The company saw four new contracts over $20m, including their first $100m deal for their flagship Linux support services.

The three other deals were tied to OpenStack, a newer product that offers companies a private cloud system.

“The results that came out [Monday] night have instilled confidence that this is not a one-trick pony,” said Jason Ader, an analyst at William Blair.

The gains in both companies came as the S&P 500 climbed 0.8 per cent by midday to 2,360.02 while the Dow Jones Industrial Average also rose by the same margin to 20,708.75. Meanwhile, the Nasdaq Composite rose 0.7 per cent to 5,878.12.