Diners are back inside their favorite sit-down restaurant chains across the U.S. Yet the so-called reopening trade on Wall Street might not be finished quite yet.
Thursday’s strong fiscal fourth-quarter results from
Darden Restaurants
DRI 4.11%
demonstrate this point. The parent company of chains including Olive Garden and LongHorn Steakhouse reported $2.28 billion in sales and $2.78 in earnings per share for the quarter ended in May. Those results topped analyst expectations. Overall comparable sales fell by just 0.5% from two years earlier, when no one had ever heard of Covid-19. In May, they grew by 2.4%.
For the coming year, Darden expects sales growth of 5% to 8% from fiscal 2021, boosted partially by 35 to 40 new restaurant openings. To top things off, the company boosted its quarterly dividend by 25%.
Investors weren’t exactly licking their lips, as the stock rallied slightly in morning trading. Darden shares have shed about 10% since March, when they reached a record high.
Granted, those who wish to nitpick Thursday’s results can find some nits. The strong fourth-quarter profit was boosted by a one-time tax benefit to the tune of 76 cents a share. And some of today’s current business strength had already been priced into shares by Wall Street earlier this year.
What is more, operating headaches such as a labor shortage and higher food costs could still sting; Darden assumes it will experience total cost inflation of 3% in its forecast. And while another wholesale shutdown of the U.S. economy is hard to imagine, smaller outbreaks in localities with lower vaccination rates could conceivably hamper operations at the margin.
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Still, shares trade at 18 times next year’s profit forecast. While not a screaming bargain by historical valuations, that isn’t especially steep for a market leader with a strong growth profile. The multiple seems more reasonable when one considers the rampant speculation in things like cryptocurrency and aging theater chains, which characterizes today’s market.
With the worst of the pandemic behind it and $1.2 billion in cash on its books, Darden can open its wallet to generate returns for shareholders. For instance, the company spent just $91.1 million on marketing expenses in the last fiscal year, down more than 60% from a year earlier. It spent just $38 million on share repurchases in the most recent quarter, but can easily afford a bigger outlay if it chooses.
Olive Garden won’t be running out of breadsticks any time soon, but this stock market deal might not last.
Write to Charley Grant at charles.grant@wsj.com
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