Investors in Darden Restaurants (DRI 0.19%) had some big questions heading into its latest earnings report. While growth at the restaurant chain had been solid in early 2022, the owner of such popular dining brands as Olive Garden and Longhorn Steakhouse had seen soaring costs on everything from labor to food inputs. Investors were also worried about a sharp slowdown ahead as consumers begin cutting expenses in response to inflation spikes.
Darden's operating update eased a few of those demand concerns while amplifying others. Let's take a look at whether investors should be excited to own this dividend stock in 2022.
Good sales trends
Darden is still benefiting from rebounding demand in the restaurant industry following the pandemic lull. Comparable-store sales jumped over 34% in its fine dining segment, which includes The Capital Grille brand, and were up by 7% and 11% at Olive Garden and Longhorn, respectively .
That surge beat the expectations of many investors who were worried that consumers might cut out restaurant trips while focusing on their budgets. That pressure didn't hurt Darden by much through late May, although growth is slowing. Overall, comps were up 12% for the quarter and 31% for the full 2022 fiscal year. "We had a strong quarter despite experiencing high inflation," CEO Rick Cardenas said in a press release.
Earnings are up
The news was positive around earnings, too. While Darden was careful not to raise prices so much that it hurt customer traffic, the chain still managed to boost overall profitability. Management found lots of room to cut costs and add efficiencies through initiatives like simplifying the menu.
These wins allowed for its restaurants to become more attractive to consumers at a time when many grocery prices are soaring. "By adhering to our strategy and pricing below inflation, we ended the year with significantly better margins," CFO Raj Vennam said.
In fact, Darden's restaurant-level profit landed at $2.6 billion for the quarter compared to $2.3 billion a year ago and a little over $2.2 billion in the pre-pandemic period. That's great news for shareholders who were worried that the chain's pricing strategy would impair profitability.
Looking ahead
Darden's outlook forecasts solid growth ahead despite the turbulent consumer spending environment. Comparable-store sales should rise by between 4% and 6%, executives predicted, marking just a modest slowdown compared to this past quarter. Earnings are expected to land between $7.40 and $8 per share, they said, compared to $7.40 per share in fiscal 2022.
Two other details in the outlook imply a bullish time for the business ahead. Management is planning to open as many as 60 new restaurants, or about double last year's expansion rate. Darden also chose to hike its dividend by 10%.
Taken together, these moves show that executives aren't especially worried about a pullback in consumer spending over the short term. And even if that decline happens, Darden seems to be operating with enough efficiency that it can remain profitable.
And the rising dividend should help protect investor returns through a downturn, provided that it isn't too sharp. That cushion, plus the prospect of solid earnings growth ahead, makes Darden a solid stock for investors to consider adding to their watch lists.