Personal Finance

Darden Restaurants Dishes Up a Win to End 2018

A table with plates of food. People are holding glasses of wine over the table in a toast.

Darden Restaurants (NYSE: DRI) -- owner of casual restaurant chains including Olive Garden, LongHorn Steakhouse, and Cheddar's Scratch Kitchen -- turned in better-than-expected results for its final earnings report of the calendar year. The multi-chain operator has been benefiting from a rebound in the restaurant industry this year, slowly scaling back discounts to boost profitability. Though it's been a winning strategy recently, Darden is hardly firing on all cylinders.

Casual-dining value on the upswing

Through the first two quarters of Darden's 2019 fiscal year (the six-month period ending Nov. 25, 2018), total sales are up 5.7% year over year. This sales growth was driven primarily by 4.4% and 3% same-store sales gains at Olive Garden and LongHorn Steakhouse, respectively.

Metric Six Months Ended Nov. 25, 2018 Six Months Ended Nov. 26, 2017 YOY % Increase
Revenue $4.03 billion $3.82 billion 6%
Operating income $337 million $303 million 11%
Earnings per share $2.24 $1.61 39%

YOY = year over year. Data source: Darden Restaurants. Chart by author.

Not all is going well, though. Cheddar's Scratch Kitchen, which Darden purchased in early 2017 for $780 million, has been struggling under the tutelage of its new owner. Same-store sales for that chain declined 2% in fiscal 2018, and the metric is down another 4% through the first six months of the current fiscal year. There are only 158 Cheddar's locations, but that's still a sizable chunk of Darden's total 1,762 store count.

It's also worth noting that Olive Garden and LongHorn's same-store sales increases are mostly due to a more favorable menu mix and price increases. Foot traffic is up only 0.4% at Olive Garden so far this year and down 0.2% at LongHorn. That, paired with the lackluster numbers from Cheddar's, is indicative of a hyper-competitive restaurant industry. According to research group TDn2K, same-store sales at the average dining-out establishment have increased slightly in 2018, but foot traffic continues to decline. For example, in the three-month period ending November 2018, comparable sales were up 1% but foot traffic was down almost 2%.

A table with plates of food. People are holding glasses of wine over the table in a toast.

Image source: Getty Images.

Falling same-store traffic has been a stubborn metric for restaurant chains for years, as the industry has rapidly added locations to accommodate consumer interest in eating out. Darden hasn't suffered the same ill effects at its value-oriented casual dining establishments, but management indicated that competitors have been increasing their promotional activity as 2018 has progressed -- something Darden scaled back on last quarter to boost the bottom line. That could eventually lure the company's patrons away to cheaper pastures.

Cooked to perfection?

There's more: Darden's performance year-to-date isn't anything particularly special. Optimistic American consumers have been spending quite a bit more money on dining out this year. Total spending on food services and bars is up 6.2% year over year through the first 11 months of 2018, according to the U.S. Census Bureau. That makes Darden's 5.7% revenue growth so far in its current fiscal year look pretty average.

Nevertheless, Darden's management and Wall Street analysts expect the company's gradual sales growth to continue. Darden expects to finish the 2019 fiscal year with same-store sales up 2.5%. Earnings per share from continuing operations is projected to come in at $5.60 to $5.70. That would be an 18% annual increase at the midpoint of the guidance range.

Darden stock trades for about 17.5 times the company's projected fiscal 2019 earnings. That isn't exactly a bargain-bin value, but it does assume Darden will deliver similar results for the next six months even as competitors in the eating-out realm are ramping up incentives to steal away hungry mouths. Given where the restaurant industry is right now, I'm being cautious with Darden -- and restaurant stocks in general.

10 stocks we like better than Darden Restaurants

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Darden Restaurants wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 14, 2018

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Personal Finance Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More