The pandemic has been hard on restaurants by forcing them to subsist on takeout and delivery orders, and some have been unable to survive. Those that have, however, have seen their stocks soar on the potential for in-restaurant dining to revive their business.

Darden Restaurants (NYSE:DRI) is among the top restaurant stock performers, with shares rallying 280% higher from their March lows. Yet as we head into the winter months, investors need to look more closely to see if the owner of Olive Garden and LongHorn Steakhouse can keep the momentum going.

Restaurant waiter bringing food order to women

Image source: Getty Images.

Made to order

Darden has fared better than many during the COVID-19 outbreak. Although sales are still down sharply from pre-pandemic levels, the restaurant operator has managed to maintain profitable operations by cutting costs. It feels confident enough in its ability to continue gaining back lost sales that it reinstated its dividend of $0.30 per share.

Unlike many of its other casual dining peers, Darden had developed a robust off-premises business before the coronavirus lockdowns began, which allowed it to almost seamlessly transition into the carryout and delivery model that became necessary to survive.

Even with its restaurants reopening, it has been able to maintain the pace of off-premise growth. Where it witnessed triple-digit gains early on in the pandemic, Darden is still seeing vigorous expansion. Olive Garden enjoyed 123% off-premise sales growth in its fiscal first quarter last month, accounting for 45% of its sales, while LongHorn continued to excel, reporting 240% off-premise sales growth, for 28% of sales.

Cash in the bank

Darden has plenty of financial flexibility available to it to weather any new downturns brought on by a second wave of coronavirus cases, or if state governors or other local officials start mandating business closures, which unfortunately has happened in some jurisdictions.

The restaurant operator has $655 million in cash and another $750 million available in an as-yet-untapped credit facility, giving Darden over $1.4 billion of available liquidity. Even with the difficult circumstances it dealt with in the first quarter, it was able to generate $160 million in free cash flow, which is why it was able to revive its dividend.

As the shareholder payout represents 53% of adjusted after-tax earnings, there is a sufficient margin of safety built in that could even see the board increase the payout in the future if conditions improve further.

New social order

Another indication of Darden's resiliency is that it has had to rely upon outdoor patio dining to supplement sales the way many other restaurants had to.

Numerous restaurants set up large tents and seating areas on sidewalks and parking lots to augment in-restaurant dining, and it helped many chains make it through the most difficult parts of the lockdown. Yet Darden said its outdoor capacity is "de minimis" systemwide, and it hasn't been able to -- or really needed to -- use it.

That's fortunate because the winter months will be unpleasant for outdoor seating in most northern climates, even if portable heaters and such are deployed. Restaurants that needed their outdoor dining areas will be hard-pressed to perform as well when winter eliminates much of the opportunity and they're forced to use only their capacity-constrained indoor seating space.

Healthy dose of skepticism

Darden does face risks too, as it has been challenged in configuring indoor dining areas. It has used Plexiglas partitions to help, and says it will roll them out further, even if their actual effectiveness is negligible.

Traffic is also going to remain severely depressed for the foreseeable future, with same-restaurant sales down 28% at Olive Garden in the first quarter and down 39% at LongHorn. That's a function of fewer people dining out and limitations imposed by states on how many people are allowed in a restaurant, often between 25% and 50% of capacity.

For investors, while Darden Restaurants stock has rebounded significantly, it still trades nearly 20% below its pre-pandemic highs. Yet with analysts seeing it growing earnings at a compounded 30% annual rate for the next five years, it might be in a better position than many of its rivals, making its stock a buy.