This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Darden Restaurants
These are the moneymakers for Orlando, Florida-headquartered, famed dining conglomerate, Darden Restaurants.
Sure, on rare occasions I have found myself dining at a neighborhood Olive Garden, well, because, you know, we’re all family here (plus coupons and gift cards were involved, romantic, right?), and I have also sunk my teeth into a nice, juicy steak from LongHorn Steakhouse (I apologize, vegetarians!), however, I have never dined at any of the other listed restaurant venues, however, from a cursory glance at their respective designs and menus, the gross margins likely aren’t all that bad given the relative swankiness of the brands.
This is all good and well, however, the sort of catch-22 in this is the fact that, sure, Darden will more than likely be able to keep margins stable during times of economic uncertainty or perhaps even during recessionary periods, however, there might be a notable drop in terms of hungry diners, at least within the certain, more price sensitive segments under the company’s corporate umbrella, thus, it’s all good if margins remain afloat, however, it doesn’t really help anyone at Darden if no one’s coming in to eat in the first place.
All things considered, however, we don’t think this has been or will be a major issue for Darden and its subsidiaries moving forward, as this company does maintain a lot of solid breadth and diversification within the dining industry given its various brands, but we still think it is something worth considering and merely keeping in the back of one’s mind as we move through this analysis.
As we have also highlighted in previous stock analysis articles, the restaurant industry is notoriously known for waste, waste and then some more waste, along with a plethora of other costs and expenses, usually cutting deeply into one’s margins, which usually aren’t even all that attractive to begin with, however, this very well might not be the case with Darden given that many (if not most) of its previously listed brands are likely to attract the less price sensitive crowd, with, for example, Olive Garden likely being its lowest margin business division, which we still assume has fairly healthy margins given the promotions it can seemingly afford to run and the amount of volume they receive in terms of diners through one venue (or restaurant unit) alone, not to mention the company’s recent acquisition of Ruth’s Chris, which surely adds to the beefing up of its overall, trailing twelve month (TTM) net profit margin.
But we will still check, of course.
Now that some of the groundwork has been laid regarding Darden Restaurants, let’s take a bite into the company’s core financials and see just how appetizing they are to the everyday investor and their respective portfolio.
Darden’s stock financials
First and foremost, Darden is an $18.7 billion company (according to its present market capitalization) with its shares (NYSE: DRI) trading at $156.01, along with a prevailing price-to-earnings (P/E) ratio of 19.39 as well as an annually distributed dividend of a whopping $5.24, which is yielding 3.36% at the moment.
With these initial figures, things are off to a good start for Darden, as its shares (according to its present price-to-earnings ratio) are trading just below the standard fair value benchmark of 20 and the company has also elected to issue a nice chunk of quarterly change to its shareholders in the amount of $1.31 (again, per quarter), implying that it has the margins to support said dividend and what is even more confidence invoking is that it apparently believes it can continue supporting this dividend, or else it simply wouldn’t make sense to have it this high to begin with.
Of course, as we dig deeper into the company’s financials, we will gain a better picture as to whether or not the company can reasonably afford to issue this high of a dividend.
According to the company’s balance sheet, Darden’s executive team is at the helm of and responsible for just about $10.2 billion in terms of total assets along with total liabilities in the amount of just north of $8 billion, which, given the industry that Darden and its subsidiaries operate within, isn’t all that bad of a balance sheet breakdown at all, with the company still remaining total asset-heavy by a comforting margin and the company’s total liabilities are likely serviceable over time, as we presume a considerable portion of the company’s outstanding debt(s) lies within its real estate, which makes sense given that it reportedly maintained the most of amount dining real estate around a decade ago, and if this is the case, given the company’s size, scale and creditworthiness and the cumulative assets to back it up, we think it will experience little to no problems or issues with slowly but surely paying down its debts.
Regarding the recent condition of the company’s income statement, Darden’s total annual revenues since 2019 have fluctuated a bit, however, one has to account for the fact that 2019 and 2020 were especially extraordinary times, particularly for the restaurant industry, shaving down its revenues around one billion dollars, as Darden’s total annual revenue in 2018 was reported as $8.5 billion, drooping down the next two years into the low-to-mid $7 billion range, however, make no mistake about it, as the relative bounce back was real, as the company’s revenues in 2022 and 2023 were respectively reported as $9.6 billion and nearly $10.5 billion.
Frankly, we are simply happy to find that there was some serious recovery with the conglomerate’s annual revenues, and more than a recovery, but actually some growth found following what has so far been the worst of COVID-19, as the company likely experienced a spike in regular customers making their way back to their favorite restaurant(s) as well as perhaps acquiring new customers through their already established restaurant units and also through the development of new restaurant units throughout the United States while rates were still low.
With respect to the company’s cash flow statement (also referencing since 2019), both Darden’s net income and total cash from operations have been consistent (and positive) for the most part, with the company’s worst net income loss only being -$52 million (who would’ve guessed, during 2020), not to mention that the company’s total cash from operations during that same year stood at $713 million, rising quite strongly in the years that followed, leading up to its latest reported total cash from operations figure of a little over $1.5 billion, as reported in during the middle of 2023.
Evidently, this company is able to generate a lot, and we mean a lot, of cash.
Darden’s stock fundamentals
With that being said, according to the figures displayed on TD Ameritrade’s platform, Darden maintains a TTM net profit margin of 9.14% to the industry’s listed respective average of 12.02%, which, to a certain degree was to be expected given that Darden just has such an expansive operational footprint, not to mention that it has restaurant chains that don’t offer as tasty of margins (restaurants listed in previous paragraphs) as some of its other properties, thus, we largely understand why Darden’s TTM net profit margin trails the industry’s average at the present rate it does, and we aren’t going to lose much sleep over it either, given that it is still largely competitive and as seen through its aforementioned total cash from operations, it is in pretty good shape on the cash generation side of things.
As it pertains to the company’s core TTM returns on both assets and investment(s), Darden’s figures in these respects are a bit scattered in the sense that its TTM return on assets is 9.25% to the industry’s respective average of 3.91% while its TTM return on investment lags a bit, standing at 11.34% to the industry’s respective average of 17.31%.
We think these figures hint at the fact(s) that Darden does a seemingly excellent job at putting its assets to work and through those assets, is able to generate outsized returns, which is indeed a great sign, however, at the same token, it is our perspective that its TTM return on investment is lacking more than likely due to the previously mentioned scale of its business and operations, as this can certainly mute a conglomerate’s relative TTM return on investment, taking a bit longer to attain more comparable and competitive TTM returns on investment due to all of its operations.
If this is the case, once again, we aren’t exactly thrilled but we are going to sleep fine at night.
Should you buy Darden stock?
There’s some good and some bad with Darden, but there certainly isn’t any ugly to be found within the facts and figures displayed above.
With the company being home to some of the world’s most popular dining brands and having an extensive (to say the least) real estate portfolio, we enjoy the company’s comfortably total asset-heavy balance sheet (at least, certainly for the dining and greater overall restaurant industry), its marked revenue rebound following what so far been the worst of COVID-19, steadily sustained cash flows during and throughout the last handful of years, and its good, not great TTM net profit margin, however, with the stock’s (NYSE: DRI) five-year runup and its prevailing price-to-earnings ratio at the time of this publication, we think there will be better, more opportune times to dip our beaks into Darden, thus, the “hold” rating, as we simply don’t see enough clearly defined growth drivers in the coming years to justify paying for essentially what it is already worth, given that its intrinsic value is already seemingly baked into its share price.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.