After Surviving the Pandemic, What’s Next for Darden Restaurants?

Darden Restaurants (NYSE:DRI) opened Dec. 9 at $112.50 per share and with a market capitalization of $14.5 billion, almost twice last year’s sales of $7.8 billion. The pandemic has been hard, but Darden has survived. It has adapted to digital sales. It is doing pick-ups with mobile apps. It even opened a few new outlets. But what does all this mean for DRI stock?

an Olive Garden sign on the front of the restaurant

Source: Shutterstock

Darden is best known for its Olive Garden restaurants, but it has a total of eight chains. Bahama Breeze is a Darden’s restaurant. So are Longhorn Steakhouse and Cheddar’s.

Given Darden’s survival, analysts are now pounding the table for the stock. TV analyst Jim Cramer says it’s more of a buy the longer the crisis continues, as rivals sink under the waves.

The Bull Case for DRI Stock

The bull case is built on a bear case regarding other restaurants. Without government help, small operators are closing by the score. This means chains like Darden may be all that’s left when people again feel safe to eat out.

Darden has managed to make money at Olive Garden while closing half its tables. It reinstated the dividend and paid back its $270 million emergency loan. Once the pandemic is over, Cramer predicts, fast-casual chains like Olive Garden will be “the height of fine dining.”

Darden is expected to report earnings Dec. 18, for the quarter ending in November. The estimate is for 72 cents per share of net income on $1.7 billion of sales. That would beat last year’s profit on 17% less revenue.

Darden will still show a loss for the current year. It took a $3.86 per share hit to earnings during the spring lockdown. But investors are buying tomorrow. Darden had $763 million of cash on its books in August. It had $209 million in operating cash flow during the August quarter. It should have more in November.

The argument is that Darden will open dozens of outlets next year, many in suburban locations city dwellers have returned to during the pandemic. There, it will find competitors cleared out by the crisis, giving it ample room to establish itself in a dining vacuum.

The Bear Case

Darden shares have had a rocky start to December. The lockdown may have been in the spring, but the pandemic is only now cresting. The next quarter may not be great, either.

Its possible restaurant stocks are getting ahead of themselves. If August’s numbers were an average, and you take out the lockdown, $2.80 per share of earnings translates to a price-to-earnings multiple of over 40.

Darden also faces labor pressure. President Donald Trump’s Equal Employment Opportunity Commission is siding with activists who say the sub-minimum wage it pays waiters, even supplemented by tips, violates the Civil Rights Act. Darden is lobbying to keep it, saying waiters at its high-end Capital Grille chain can earn as much as $41 an hour.

But Darden may not get much love from an administration under President-elect Joe Biden. As unemployment goes down, it will have to compete for workers. A falling pool of young workers will also put upward pressure on wages.

The Bottom Line

I miss Olive Garden. I miss hot food and the clink of restaurant glasses. I miss the breadsticks. But that’s no reason to let your guard down.

Before the pandemic hit, Darden shares were paying a dividend of 88 cents per share each quarter, a yield of 3% at the stock’s current price. Before the pandemic, Darden shares were rising 30% per year, and it’s still 10% below its pre-pandemic peak.

If analysts are right, 2021 should be a banner year. Darden chains like Capital Grille, Season’s 52 and Eddie V’s could exploit a vacuum in fine dining.

My only problem is that nature abhors a vacuum. As 2021 becomes 2022 and 2023, competition will return. If you buy DRI stock, keep your eyes peeled for the off-ramp. It will come when everyone has fallen in love with it.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 

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