Investors were piling into Darden Restaurants (NYSE:DRI) stock on Thursday, despite the fact that the restaurant stock had a subpar quarter and missed earnings and revenue estimates.
Darden’s stock price was up some 7.6% Thursday afternoon, trading at around $170 per share. So, what drove the stock price higher for the owner of the Olive Garden and LongHorn Steakhouse chains, among others?
More importantly, should you consider buying this relatively cheap restaurant stock?
Slower than expected sales
Darden Restaurants reported fiscal first quarter earnings Thursday morning and the results were solid, although they fell short of estimates.
Darden generated $2.76 billion in sales, up modestly from $2.73 in the same quarter a year ago, but below estimates of $2.81 billion. Net earnings jumped 7% year over year to $207 million, or $1.74 per share, which was below estimates of $1.84 per share.
Overall, the increase in sales was driven by the opening of 42 new restaurants in the quarter. However, sales at existing restaurants, called same store sales, were down 1.1% in the quarter.
Olive Garden, Darden’s largest chain with 923 restaurants, saw same-store sales drop 2.9% and sales fall 1.5% year over year. LongHorn Steakhouse, its second largest brand with 577 locations, saw same store sales increase 3.7% and sales climb 7%.
Same store sales at its fine dining restaurants, which include Ruth’s Chris Steak House, The Capital Grille, and Seasons 52, were off 6%, while its other businesses, which include the Yard House, Cheddar’s Scratch Kitchen, Bahama Breeze, Eddie V’s and The Capital Burger, saw same store sales fall 1.8% in the quarter.
“While we fell short of our expectations for the first quarter, I firmly believe in the strength of our business,” Darden President and CEO Rick Cardenas said. “I am confident in the actions all our brand teams are taking to address their guests’ needs, which do not compromise the long-term health of our business for short-term benefits.”
Part of today’s rally for Darden stock certainly has to do with the surge in the overall market, sparked by the Fed’s 50 basis point rate cut.
But Darden also got a lift due to its outlook for the rest of the year and increased traffic this quarter at its restaurants.
“The significant step down in traffic during July, led to our first quarter earnings being lower than expected,” Darden CFO Raj Vennam said. “Following the softness in July, our sales trend has continued to improve. Considering this recovery as well as the planned initiatives to support the remainder of the fiscal year, we are reiterating our guidance for fiscal 2025.”
Maintaining its guidance, and not lowering it after a subpar Q1, gave the market confidence that sales should spike over the next few quarters. Darden reiterated all aspects of its full year outlook for fiscal 2025, including earnings per share of $9.40 to $9.60, which would be up about 10% year over year at the low end from fiscal 2024.
That does not include any impact from the acquisition of Chuy’s and its chain of 101 Tex-Mex restaurants in 15 states, which is expected to be neutral to Darden’s EPS in fiscal 2025.
But the company anticipates that it will be accretive to earnings by approximately 12 to 15 cents in fiscal 2027.
Darden is also rolling out an online on-demand delivery program with Uber (NASDAQ:UBER) starting in late 2024 with select Olive Garden restaurants, and then expanding to all of the Olive Gardens by May 2025.
Is Darden stock a buy?
Investors seem optimistic that, despite a lackluster Q1, things are headed in the right direction for Darden given its projections for fiscal 2025 and its new initiatives.
The stock is trading at a decent valuation, at just 16 times earnings, and it seems to have some short-term tailwinds and longer-term growth catalysts.
Analysts are not particularly bullish on Darden stock with a median price target of $171 per share, which suggests little growth in the stock price, but that may change post earnings.
Darden stock has been a good, solid performer over the years, with a 14% average annualized return over the past 10 years. With inflation down, the restaurant industry is expected to stabilize in 2025, which makes Darden an interesting option.
While the outlook is promising, I just don’t know if there’s enough visibility yet to warrant a buy, given there are better options out there. It also may be wise to let things settle a bit after the rate cuts and earnings to see if Darden stock trends lower into a better buying range.