Darden Restaurants (DRI -0.28%) isn't a household name, but the brands it owns are, including Olive Garden, Longhorn Steakhouse, and The Capital Grille, among others. Investors have been flocking to the stock over the past year, pushing it up by nearly 50%. There are solid reasons for that advance, but at this point investors may be pricing in too much good news.
What a streak
In its fiscal 2023's fourth quarter, which ended in May, Darden posted a 6.4% year-over-year sales increase. Earnings grew an even more impressive 15.2%. Same-store sales, which removes the noise from newly opened and closed restaurants, jumped a healthy 4%. These are very strong numbers and, notably, they outdistance the average for the company's dine-in peer group, with same-store sales for the group dropping 0.7% over the same time frame.
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For the full fiscal 2023 year, Darden's sales increased 8.9%. Earnings per share rose 8.1%. And same-store sales climbed 6.8%. Same-store sales for the company's peer group were up just 2.7%. Basically, fiscal 2023 was a good year and it ended on a solid note.
It isn't hard to see why investors have pushed Darden's stock up nearly 50% over the past 12 months. That's a big move in a short period of time, however, and investors should probably step back and take stock. Here are some reasons to worry about buying Darden shares today.
1. Slowing down
One thing worth highlighting is the difference between the fourth-quarter 2023 figures and those of the full fiscal year. Sales, earnings, and same-store sales were all lower in the final stanza of the year than they were for the whole year. That suggests that Darden's strong performance may be leveling off. Furthermore, the quarterly comparisons will be difficult as fiscal 2024 unfolds. In fact, management is only projecting same-store sales to rise between 2.5% and 3.5% in the upcoming year. That's not bad, but it clearly isn't as good.
This isn't a knock on the restaurant company, which seems to be executing very well overall. But strong performance by any business can only go on for so long before it slows down. The trouble is investor sentiment often curdles when a company's performance wanes.
2. Getting paid
Another issue here is the dividend yield, which sits at roughly 3.2% today. That's not terrible considering that an S&P 500 index ETF will only net you a 1.6% yield. However, you can easily find a CD that would provide you with more income. And more importantly, the stock's yield is, at best, middle of the road, historically speaking. That suggests that Darden's stock is fairly priced today. Given the big run-up and the clear potential for slower performance ahead, dividend investors would probably be better off waiting for a more attractive yield.
3. Looking expensive
If you examine traditional valuation metrics like the price-to-sales, price-to-earnings, and price-to-book-value ratios, Darden starts to look downright expensive. All three of these metrics are above their longer-term averages. To put some numbers on that, the current P/E ratio of 20.9 is above the seven- year average of 19.4; the current P/B ratio of 9.1 is notably above the historical average of roughly 6; and the P/S ratio of 1.9 is higher than the average of 1.7.
That's not exactly surprising given the huge run-up in the share price. But when coupled with points one and two, it suggests that investors with a value bias will likely find the shares unappealing. Waiting for a pullback, which could easily happen if fiscal 2024 results start to show a slowdown taking shape, could be a better option than chasing a hot stock.
Great performance, too pricey
Darden's management is executing at a high level, and Wall Street is rewarding it for that success. Investors looking at the stock today, however, have to consider the future from here, with the stock seemingly already pricing in that good news -- and perhaps expectations of more to come. Given the high valuation, historically speaking, and the modest yield, the risk/reward balance seems skewed in the wrong direction right now.
