Some investors fear economic uncertainty and rising inflation will wreak havoc on restaurant stocks, but Darden Restaurants (DRI -0.01%) didn't get the memo. The $15 billion company, which boasts a portfolio of eight different restaurant concepts, most prominently Olive Garden, just reported a very strong fourth quarter.
Darden is impressively managing this latest turbulence, and looks like a solid port in the storm during the current economic environment and beyond.
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Everyday value
The chain reported same-store sales growth of 11.7% and overall revenue growth of 14.2% as it opened 33 net new restaurants. Furthermore, Darden is forecasting a strong 2023, guiding for 6% to 8% revenue growth and 4% to 6% same-store sales growth. The company expects inflation of 6% but plans to continue its strategy of "underpricing" inflation by increasing prices by 5%, so that it protects its margins while still offering a solid value proposition for its consumers.
The company says it does not expect to discount heavily to drive volume in the event that the economy worsens. I like the fact that Darden's strong margins give it the ability to provide discounts to drive traffic if needed but that it doesn't see value in making short-term moves that will hurt it in the long run. Darden prides itself on offering customers "everyday value," and economic options like Olive Garden and Cheddar's could prove to be resilient as affordable choices for consumers who want to celebrate and dine out during a time of economic uncertainty.
All about scale
A large part of the company's ability to successfully navigate through challenging times is the way that it intelligently and effectively utilizes its scale. Darden talks about its scale as a major advantage that allows it to keep expenses in line while wringing out other synergies. For example, on the most recent conference call, new CEO Rick Cardenas talked about how Darden's revenue is twice that of its largest full-service restaurant competitor and 2.5 times that of the next on the list.
Olive Garden is the largest full-service restaurant concept in the U.S. in terms of sales. Cardenas says that this scale creates cost advantages that its individual brands would not be able to achieve on their own. With eight concepts and over 1,800 total locations across the portfolio, Darden uses this scale to reduce SG&A costs by spreading it across its restaurants. Its large and diverse base of restaurants can also be used to gather data and insights into its customer base in a way that a smaller brand would not be able to do
Additionally, Darden's scale has allowed it to invest in technology. For example, Cardenas says that Darden has been able to utilize artificial intelligence and machine learning to order food at more accurate levels, which in turn cuts down on costs by cutting waste. Darden states that this scale allows it to maintain general and administrative costs of just 3.9% of its revenue, which is far lower than those of its industry peers, which it finds to be 5.4%. This lower spending allows it to boast higher margins than its peers, with its 12.1% net operating income margin standing at nearly double the industry average of 6.3%, according to the company's analysis.
Serving up shareholder returns
Darden just raised its quarterly dividend payout by 10% to $1.21. An old investing adage says that the safest dividend is the one that was just raised, and the raise can be seen as a sign of Darden's confidence in its business despite the uncertainty in the broader market. Shares of Darden now yield over 3.5%, which is a very nice payout -- and more than twice the yield of the S&P 500.
In addition to the dividend boost, Darden had even more good news for investors, announcing a new $1 billion share buyback authorization. It allows the company to buy back about 6.5% of its shares outstanding based on its current share price. Share buybacks are beneficial to investors as they reduce share count and thus increase earnings per share, and they can also be viewed as a sign that management believes the shares are undervalued.
Darden is doing a good job of returning capital to shareholders, and the shares are still available for a modest valuation -- 16 times earnings, which is slightly lower than the broader market.
A port in the storm
Thanks to its solid performance, modest valuation, and generous dividend payout, Darden looks like a solid port in the storm for investors. The company's scale, strong margins, and focus on keeping general and administrative costs down make it a strong candidate to continue performing well no matter what the economy throws at it.
Editor's note: This article has been corrected. Darden Restaurants does not own Texas Roadhouse.
