Personal Finance

Olive Garden Is Bucking the Restaurant Recession

An exterior of Olive Garden.

Shares of Olive Garden parent Darden Restaurants (NYSE: DRI) hit another all-time high on Tuesday, moving up after another quarter of better-than-expected financial results for its fiscal fourth quarter, which ended in late May. Most restaurant chains are struggling these days, and pundits say we're in a restaurant recession. Darden Restaurants is growing, oblivious to the struggles we're seeing at many of its casual-dining peers.

However, Darden's results -- with healthy growth in comps, revenue, and adjusted earnings -- aren't as good as they look. The 8.1% sales uptick includes the 140 Cheddars Scratch Kitchen locations it acquired two months into the fiscal quarter in a $780 million transaction . The 7.3% spike in adjusted earnings per share is slightly inflated by Darden's buying back stock. Actual adjusted net income clocked in just shy of 6%.

Overall, things are still moving in the right direction. Darden's two needle-moving concepts -- Olive Garden and LongHorn, which combined for 78% of consolidated revenue in fiscal 2017 -- checked in with comps growth of 4.4% and 3.5%, respectively. Folks may be eating less at some iconic chains, but that's not the case at Darden's concepts.

An exterior of Olive Garden.

Image source: Olive Garden.

Bread sticks

Comps are up as customers willing to pay more -- a dream scenario when millennials are saving money by eating at home. The good times will continue in the near term, as Darden initiated encouraging guidance for fiscal 2018, seeing 1% to 2% in same-restaurant sales growth. The operator of 1,695 restaurants expects to add 35 to 40 new locations this year, though the addition of Cheddar's along with comps and expansion will lead to 11.5% to 13% in sales growth.

Darden also sees adjusted earnings per share from continuing operations of between $4.38 and $4.50 in the new fiscal year, up from $4.02 in fiscal 2017. The rosy growth outlook is giving Darden enough wiggle room to raise its dividend a dramatic 12.5% to $0.63 per share, translating into a 2.7% yield as of Tuesday's close.

There are some downsides to all the good news, though. For one thing, Darden sees labor inflation rising faster than its projected comps growth. It also says it's experiencing weakness in New York City and Houston. Still, most of Darden's competitors would kill for those kinds of problems.

Overall, Darden's doing things right, and it's at new highs because it's finding a way to thrive in the restaurant recession.

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Rick Munarriz has no position in any 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.

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