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Why Darden Restaurants Stock Rallied 16% in September

By Reuben Gregg Brewer – Updated Oct 6, 2020 at 10:49AM

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Shares of the restaurant owner continued to recover in September as business continued to get back toward normal.

What happened

Shares of Darden Restaurants (DRI -1.05%) rose an impressive 15% in September according to data from S&P Global Market Intelligence. That continues the Olive Garden and LongHorn Steakhouse owner's steady march back from its bear market lows in March. At one point the stock was off by roughly 70% for the year. By the end of September that loss had been pared to just 8% or so. 

So what

The story for Darden should be pretty familiar to investors at this point. The economic shutdowns used to slow the spread of COVID-19 effectively closed all of the restaurant owner's locations. It had to swiftly shift gears and focus on takeout, but there's not enough business opportunity there to support the company's collection of physical assets. The stock started to pick up when non-essential businesses were allowed to begin the reopening process. 

An arm pointing to graph on computer screen

Image source: Getty Images.

While the business is in no way back to pre-pandemic performance levels at this point, Darden provided a positive update in late September when it reported earnings. Sales were off across all of the company's restaurant concepts, but it managed to earn $0.29 per share in the quarter. Take out one-time items, and adjusted earnings were an even better $0.56 per share. That's a steep 60% drop from the year-ago period's results, but it suggests that Darden's business is holding up fairly well despite the huge headwinds it is facing. And that helped keep investors in a positive mood. Aiding the upbeat sentiment was the company's decision to reinstate its quarterly dividend at $0.30 per share, which is a clear show of strength.  

Now what

Darden is still working to get its business back to the pre-pandemic norm. The recent earnings update showed strength in the face of adversity, but also highlighted that the company has a long way to go before it can call an all clear. While the early recovery success has been impressive, a lot of uncertainty remains. Not least of which is the recent uptick in cases of COVID-19, which could lead to further headwinds if the pandemic's infection trends get bad enough. Conservative long-term investors should probably tread with caution here. The impressive recovery the stock has made since its early-year lows is likely pricing in a lot of good news despite the great uncertainty that still exists. 

Reuben Gregg Brewer has 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.

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