Over the past year, the S&P 500 index is down around 11%. By comparison, Darden Restaurants (DRI 0.46%) has seen its stock price increase by nearly 15%.
What's behind this disconnect with the broader market, and can this iconic restaurateur continue to shine? Here's a quick look at what's been happening with the owner of Olive Garden Restaurants lately.
Hitting on all cylinders
Every one of Darden Restaurants' business groups witnessed double-digit year-over-year same-store sales growth in the fiscal third quarter of 2023 (which ended Feb. 26). The total tally was an 11.7% improvement, with Olive Garden at the lead, achieving same-store sales growth of 12.3%. That's an important relative showing, but a little more information is needed to understand why.
Image source: Getty Images.
Darden breaks its business down into four brands and/or brand groupings. There's Olive Garden (an Italian-themed casual-dining brand); Longhorn Steakhouse (a casual-dining steakhouse); fine dining (a collection of high-end brands like Capital Grille); and "other" (smaller brands that are largely in the casual dining space).
With sales of just over $1.3 billion in the fiscal third quarter, Olive Garden is roughly twice the size of the company's next-largest business grouping. Alone, Olive Garden makes up a little more than 45% of Darden's revenue.
Clearly, Darden's most important brand is Olive Garden. The way this restaurant brand is positioned, meanwhile, is as notable today, as inflation put increasing pressure on consumers' wallets. It is, essentially, trying to provide good food at reasonable prices.
Highlighting this is the all-you-can-eat breadsticks it offers and the all-you-can-eat soup or salad that comes with every meal. Some people (and I'm not naming names) might have multiple servings of Zuppo Tuscano (which is hearty, delicious, and a great location for dipping free bread sticks) and, subsequently, only be able to eat a few bites of the main meal (which turns into lunch the next day).
Consumers looking to eat out when money is tight will probably find the value equation of Olive Garden very compelling. That includes people trading down from higher-cost fare and up from fast food for those seeking something "more" than a takeout burger.
Being in the "middle" isn't always a great place, but right now it seems to be working well for Darden. Given the economic uncertainty today, the Olive Garden concept clearly has the wind at its back.
What's it worth?
Restaurants go in and out of favor, so it isn't reasonable to expect any of Darden's brands to perform strongly forever. Thus, investors need to make sure to consider valuation, particularly given the stock's relative strength over the past year compared to the S&P 500 index.
Using dividend yield as a rough gauge of valuation suggests that the stock is roughly fairly priced. The 3.2% yield is about middle of the road compared to the stock's historical yield range.
In fairness, 3.2% is well above the 1.6% yield you'd get from an S&P 500 Index ETF, but it is also lower than you could probably achieve with a bank CD at the moment. If you are trying to find a completely safe place to ride out Wall Street turbulence, there are likely better options.
However, some traditional valuation metrics paint a more attractive picture. For example, Darden's price-to-sales ratio is currently below its five-year average. That's also true for the stock's price-to-earnings ratio and for price-to-forward earnings, which includes analyst expectations of future results. Only the price-to-book value ratio is above its five-year average, hinting that, on the whole, Darden may be fairly priced, if not a little cheap today.
If you are willing to pay nearly full price, but not quite, for a company that's performing well in a difficult market environment, Darden stock seems fairly attractive right now. And the strength and positioning of the Olive Garden brand is a key reason to believe that the strong business-level performance will continue. So long as that remains the case, it is highly likely that Wall Street will view Darden favorably.
Worth a close look
If you are a conservative dividend investor trying to find a consumer discretionary stock that can hold up to hard times, Darden might be a solid stock to buy today. While not a screaming value, it does seem at least reasonably priced. Add in the strong recent performance in the face of economic turbulence, and the story gets even better over the near term.
