The coronavirus health crisis brought Darden Restaurants (DRI 0.19%) to its knees nine months ago. The parent company of Olive Garden and LongHorn Steakhouse was forced to shut down its dining rooms across the country and refocus on takeout and delivery options. Share prices plunged from $122 to $26 in the span of roughly two months before mounting a long, slow comeback.
Today, Darden's stock trades just 7% below the all-time highs set in the late summer of 2019. Is this a good time to buy Darden shares?
A snapshot of Darden's business
The company reported second-quarter results last Friday. Same-store sales fell 21% year over year, led by a 31% drop in fine dining revenues. That's much better than the 48% same-store sales plunge that Darden reported in the fourth quarter of 2020, which was the darkest part of the COVID-19 tunnel. It's also a far cry from a full recovery.
Furthermore, both Olive Garden and LongHorn Steakhouse saw their recovering sales trends sour in the second half of the second quarter. Olive Garden's same-store sales drop recovered to roughly 22% in early November, but fell back to a 37% decline in the second week of December. For LongHorn, a 12% decline nearly doubled to 23% over the same period. It's not easy to keep the business improvements going when restaurants are facing new lockdowns in another wave of coronavirus infections. The percentage of Darden-owned restaurants with at least limited access to their dining facilities fell from 92% to 75% in the span mentioned above.
On the upside, Darden kept a tight grip on its expenses. Labor costs came in 23% below the year-ago period's reading and the marketing budget was slashed by 72%. Adjusted earnings landed at $0.74 per share, just ahead of Wall Street's estimates. Encouraged by the respectable bottom-line performance, Darden issued dividends of $0.37 per share, up from $0.30 per share in the previous quarter and no payouts at all in the two periods before that.
Is Darden a buy today?
Darden is paying out juicier dividends, opening more restaurants than it is closing, and managing its bottom-line profits with a deft hand in a difficult market. The pandemic also forced the company to improve its delivery, takeout, and mobile ordering systems. The company is also profitable and armed with a solid balance sheet. All of this adds up to a solid foundation from which Darden can continue to reach for better days ahead. When the pandemic goes away, this company should be in a strong position to benefit from pent-up demand for restaurant experiences with a more robust top-to-bottom business model.
However, Darden's investors appear to have accounted for the good stuff in the current stock price. It's better to buy a great business at a reasonable price than a decent company at a great price, but Darden's stock looks too expensive for that quality-focused investment thesis right now. The bulls are getting ahead of themselves here.
This is not a good time to bet the farm on Olive Garden and LongHorn Steakhouse. It's better to keep an eye on Darden, preparing to buy a few shares on temporary drops along the way.