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Darden Restaurants Earnings: The Rebound Is in Full Swing

By Demitri Kalogeropoulos - Updated Jun 25, 2021 at 5:48PM

Key Points

  • Darden's latest results show that investors weren't off-base to expect a dramatic growth rebound as the economy reopened.
  • The company is expecting a positive selling environment for the year ahead.
  • Yet costs are up, and Darden stock is more expensive than it has been in years.

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Diners are back, and the outlook is brighter for the fiscal year ahead.

Investors had high expectations going into Darden Restaurants' (DRI 1.29%) recent quarterly report but were still surprised by the scale of the recent growth rebound. The owner of the Olive Garden and Longhorn Steakhouse brands issued an aggressive annual outlook after customer traffic surged in early 2021. And its monthly sales metrics describe continuing acceleration into the summer months.

Let's take a closer look.

Beating targets

Sales rose 80% compared to the year-ago period that included some of the worst impacts of the pandemic. That result was enough to beat Wall Street's elevated expectations for the restaurant chain. Most investors were looking for growth of about 70% year over year.

People sharing pizza at a restaurant.

Image source: Getty Images.

Demand trends looked good when compared to 2019, with comparable-store sales down less than 1% from that high mark. Darden's Olive Garden segment shrank a bit faster, but its LongHorn Steakhouse brand attracted plenty of sit-down and to-go business. "We had a strong quarter that exceeded our expectations," CEO Gene Lee said in a press release.

Spending cash

Darden wasn't immune to inflation pressures, including higher wages. Yet operating costs were restrained and earnings beat management's targets. "We have made ... strategic investments in our business, streamlining our operations and improving productivity," Lee said.

Some of that efficiency is coming from reduced staffing, which likely helped operations in this tight labor market. But Darden might still be in for a period of surging labor expenses, especially if customers continue to fill its booths.

Looking ahead

The short-term outlook is bright. Darden released monthly sales data that show accelerating demand for dining that could make for a record summer ahead. Comps were up 2.4% in May as compared to the 2019 period after having risen 1.1% in April on that basis. Comps fell 4% in March but have returned to solidly positive territory as vaccination rates soared.

That encouraging trend helped convince executives to raise Darden's dividend while issuing a bullish 2022 outlook. They're targeting comps of between 25% to 29%, translating into between 5% and 8% sales growth as compared to 2019, the last pre-COVID period. Earnings should land at between $7 and $7.50 per share, compared to $5.82 in 2019.

Investors cheered the report, with the stock rising in early trading on Thursday morning following the announcement. Share prices are now up over 15% so far in 2021 and have jumped more than 80% since mid-2020.

DRI PS Ratio Chart

DRI P/S ratio data by YCharts.

You might be turned off by a rally like that, or by the fact that Darden is now valued at near 3 times annual sales. That's roughly twice its valuation before the pandemic struck. There's a chance the restaurant chain's growth will slow right back down to its pre-pandemic rate in the next few quarters, which would spell bad news for stock returns from here. But for now, Darden is in a period of strong demand that is showing no signs of slowing into the summer months.

Demitri Kalogeropoulos 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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Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
$131.91 (1.29%) $1.68

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