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Is This Restaurant Stock Fried?

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Darden Restaurants (NYSE: DRI  ) released its fourth-quarter earnings on June 22, and while it's not all bad news, I can see why some investors won't be complimenting the chef this time around.

Darden, best known for its leading brands Olive Garden and Red Lobster, reported a 3.8% increase in total sales compared to Q4 2011. This sounds good... until you realize that Darden has 100 more restaurants under management this year. Meanwhile, revenue from Olive Garden and Red Lobster restaurants that have been open for at least 16 months, also called "same-restaurant sales," dropped 1.8% and 3.9%, respectively, compared to Q4 of last year.

Darden definitely has some work to do, but, despite these stagnant sales, I still think that four key strengths make it a tasty stock for long-term investors.

You like me; you really like me!
First, despite competition from DineEquity (NYSE: DIN  ) , Brinker International (NYSE: EAT  ) , BJ's Restaurants (Nasdaq: BJRI  ) , and Bravo Brio (Nasdaq: BBRG  ) , Darden has an edge.

It may sound simple, but people really, really like to eat at its restaurants.

Red Lobster currently tops the full-service restaurants division of the American Customer Satisfaction Index, which examines factors like "customer loyalty" and "perceived value." In fact, Red Lobster and Olive Garden have been near or at the top of the ACSI rankings for the past five years and have consistently outperformed Brinker's Chili's. DineEquity's Applebee's, appearing in the survey for the first time this year, is a full six points behind Red Lobster.

The people have spoken, and you couldn't remove their lobster bibs if you tried.

If Darden remains committed to its customers, and Red Lobster claws away at the competition in the ACSI rankings, it will have no problem maintaining its brand strength.

Strategic smorgasbord
Second, unlike most of its competitors, who rely on two or three chains, Darden has a number of restaurants in its portfolio that target diverse market segments. In fact, one of the reasons that Darden increased revenue this quarter, despite the same-restaurant sales decline of Olive Garden and Red Lobster, comes down to the great performances of its lesser known premium and themed brands. For instance, Darden's Bahama Breeze and The Capital Grille chains each reported 2.8% increases in same-restaurant sales compared to last year. LongHorn Steakhouse, another Darden brand (and every vegetarian's worst nightmare), also increased comparable sales by 3% this quarter.

Brand depth is a powerful asset for Darden, and should help to keep revenue up in future quarters if one or two of its chains fall short.

Trimming the fat
Third, bringing costs down is just as important as keeping sales up. Darden's operating margin over the last 12 months has been better than Brinker, BJ's, and Bravo Brio, but far behind DineEquity.

Company Name

Operating Margin (TTM)

Darden Restaurants 9.3%
Brinker International 8.2%
BJ's Restaurants 7.3 %
Bravo Brio Restaurant Group 6.5%
DineEquity 23.1%

Source: Yahoo! Finance.

The Orlando Sentinel recently reported that Darden is implementing new supply chain technology that should improve margins and save $45 million a year. These savings only represent 1.8% of Darden's total food and beverage costs over the last 12 months, but still demonstrate a move in the right direction. I expect Darden to more aggressively improve margins over the long term.

Juicy dividends
Lastly, Darden distinguishes itself from BJ's, Bravo Brio, and DineEquity by paying a meaty quarterly dividend. This was just raised from $0.43 to $0.50 a share and is good for a 3.9% yield, and Darden's healthy 48% payout ratio indicates it will be serving this dividend for years to come. Brinker also pays a quarterly dividend, but at a 2% yield, Darden is the clear winner in this category.

Considering these four strengths, I think Darden Restaurants is a great stock for long-term investors. If you are hungry for more dividend-paying stocks, take a look at The Motley Fool's picks in this free report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." Our top analysts think these nine stocks are no-miss wealth builders. You can learn about them at no charge today by clicking here now.

Fool contributor Max Macaluso holds no position in any company mentioned. The Motley Fool owns shares of Darden Restaurants and BJ's Restaurants. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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