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Is Darden Restaurants Stock a Buy?

By Anders Bylund – Jun 26, 2020 at 8:11AM

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The Olive Garden parent suffered in this spring's coronavirus lockdowns, but this company is a winner in the long run.

Restaurant-chain Darden Restaurants (DRI 5.43%) took the economic fallout of COVID-19 mitigation efforts right on the chin. The parent company behind Olive Garden and LongHorn Steakhouse is trading 35% lower in 2020, even after bouncing nearly 180% higher from the market bottom in March.

It could've been worse, though. Darden's fourth-quarter results were dreadful compared to the year-ago period's figures, but the report still exceeded Wall Street's estimates across the board.

Photo of a restaurant door with a sign reading Come In We're Open.

Image source: Getty Images.

A quick business update

In the fourth quarter, which ended on May 31, Darden's sales fell 43% year over year to $1.27 billion. The bottom line swung from earnings of $1.76 per share to a $1.24 net loss per share, adjusted to exclude non-cash asset impairment charges. Your average analyst would have settled for a loss of $1.72 per share on revenues near $1.24 billion.

Surprises of this magnitude would normally send share prices skyward, but Darden's stock barely moved on the news. This wasn't a victory march, but a wounded company doing its best to survive.

You'll find similar stories in every corner of the restaurant industry. The COVID-19 lockdown era's reliance on takeout and delivery orders was a nasty surprise for every player in this industry that didn't already offer drive-through windows for most of their locations. Cracker Barrel's (CBRL 6.28%) May quarter saw sales falling 42% year over year. Dave & Buster's (PLAY 6.00%) took a 56% top-line cut for the quarter ending in May.

Darden dominates

The coronavirus period will leave deep scars in this industry. Some companies will survive and thrive when things get back to normal in 2021 or 2022. Others will either go bankrupt or lose a massive slice of their market share to the real winners. Investors in the restaurant sector must figure out which restaurant chains will land in the winners' circle. Those are the ones you buy at a discount.

Darden has unique advantages that give it an edge over most of its fast-casual restaurant rivals.

  • Darden's annual sales are more than twice the size of the sector's runner-up, Outback Steakhouse parent Bloomin' Brands (BLMN 6.29%).
  • The company's return on equity (ROE) towers over the competition at 27%. Bloomin' plays second fiddle again, with a 19% ROE reading. That's a sign of an effective management team running a well-oiled machine.
  • We're talking about a cash machine here. Darden generated $258 million of free cash flows in 2020, a fiscal period that included the brutal fourth quarter with COVID-19 lockdowns. Operating cash flows even stayed positive in the last period.

These sector-leading trends are not new. Olive Garden and LongHorn have been crushing it for years. Take a look at the free cash flows of Darden and friends over the last five years (excluding the last quarter, because Darden's latest report is too hot off the presses to make it into YCharts' data feeds):

DRI Free Cash Flow Chart

DRI Free Cash Flow data by YCharts.

Darden's sales tend to grow while its rivals are treading water:

DRI Revenue (TTM) Chart

DRI Revenue (TTM) data by YCharts.

Darden is well equipped to make it through the COVID-19 pandemic, probably grabbing market share from weaker rivals along the way. I wouldn't mind waiting a bit to see if the return of coronavirus outbreaks will bring Darden's share price down a bit, but this is a solid business with a bright long-term future.

Darden is a buy today, even if the next few months are shrouded in uncertainty. Leave some dry powder in your cash reserves so you can pick up more Darden shares at lower prices if we're headed for another big market drop.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$132.22 (5.43%) $6.81
Bloomin' Brands Stock Quote
Bloomin' Brands
BLMN
$19.60 (6.29%) $1.16
Cracker Barrel Old Country Store, Inc. Stock Quote
Cracker Barrel Old Country Store, Inc.
CBRL
$97.15 (6.28%) $5.74
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
PLAY
$33.21 (6.00%) $1.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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