Restaurant company Darden (NYSE:DRI) reported results in line with analysts' expectations in Q1 FY2024, with revenue up 11.6% year on year to $2.73 billion. Turning to EPS, Darden made a GAAP profit of $1.59 per share, improving from its profit of $1.56 per share in the same quarter last year.
Darden (DRI) Q1 FY2024 Highlights:
- Revenue: $2.73 billion vs analyst estimates of $2.71 billion (0.83% beat)
- EPS: $1.59 vs analyst expectations of $1.73 (8.2% miss)
- Free Cash Flow of $118.2 million, down 54.2% from the previous quarter
- Gross Margin (GAAP): 20.4%, up from 18.5% in the same quarter last year
- Same-Store Sales were up 5% year on year
- Store Locations: 1,998 at quarter end, increasing by 123 over the last 12 months
Started in 1968 as the famous seafood joint, Red Lobster, Darden (NYSE:DRI) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.
Although it no longer owns Red Lobster (sold to private equity firm Golden Gate Capital in 2014), Darden has expanded its banners through acquisitions, including iconic full-service restaurant chains such as Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, and Bahama Breeze.
Each brand offers a unique culinary experience, showcasing a range of flavors, cuisines, and atmospheres to suit various tastes and dining preferences. For example, casual diners can indulge in unlimited breadsticks and beloved Italian classics at Olive Garden while fine diners can enjoy a perfectly grilled steak at any of The Capital Grille’s upscale locations.
Despite these differences, the unifying theme between Darden’s restaurants is a commitment to exceptional customer service. The company places great emphasis on providing warm and welcoming environments, ensuring that guests feel at home as soon as they step through its restaurants’ doors.
Darden has also embraced technology to meet the evolving demands of the modern dining landscape. Many of its banners offer online reservation systems and convenient mobile apps for easy booking and ordering. These digital innovations streamline the dining process, providing customers with greater convenience and flexibility.
Sit-Down Dining
Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.
Multi-brand full-service restaurant competitors include Bloomin’ Brands (NASDAQ:BLMN), Brinker International (NYSE:EAT), Dine Brands (NYSE:DIN), Texas Roadhouse (NASDAQ:TXRH), and The Cheesecake Factory (NASDAQ:CAKE).Sales Growth
Darden is one of the most widely recognized restaurant chains in the world and benefits from brand equity, giving it customer loyalty and more influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 5.84% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre, but to its credit, it opened new restaurants and grew sales at existing, established dining locations.
This quarter, Darden's year-on-year revenue growth clocked in at 11.6%, in line with Wall Street's estimates. Looking ahead, the analysts covering the company expect sales to grow 8.8% over the next 12 months.
Number of Stores
When a chain like Darden is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Since last year, Darden's restaurant count increased by 123, or 6.56%, to 1,998 locations in the most recently reported quarter.
Over the last two years, Darden has opened new restaurants and averaged 2.52% annual growth in new locations, higher than other restaurant businesses. Comparisons, however, should be taken with a grain of salt as the industry is quite mature. Analyzing a restaurant's location growth is important because expansion means Darden has more opportunities to feed customers and generate sales.
Same-Store Sales
Same-store sales growth is a key performance indicator used to measure organic growth and demand for restaurants.
Darden's demand has been spectacular for a restaurant business over the last eight quarters. On average, the company has grown its same-store sales by an impressive 14.6% year on year. This performance suggests its steady rollout of new restaurants could be beneficial for shareholders. When a company has strong demand, more locations should help it reach more customers seeking its meals.
In the latest quarter, Darden's same-store sales rose 5% year on year. This growth was an acceleration from the 4.2% year-on-year increase it posted 12 months ago, which is always an encouraging sign.
Gross Margin & Pricing Power
Darden has weak unit economics for a restaurant company, making it difficult to reinvest in the business. As you can see below, it's averaged a 20.1% gross margin over the last eight quarters. This means the company makes $0.20 for every $1 in revenue before accounting for its operating expenses. 
Darden's gross profit margin came in at 20.4% this quarter, marking a 1.9 percentage point increase from 18.5% in the same quarter last year. One quarter doesn't paint the whole picture, but this margin expansion was comforting as it signals the company was operating in a less competitive environment with better pricing power and more stable input costs (such as ingredients and transportation expenses). We'll continue watching to assess the sustainability of this momentum.
Operating Margin
Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Darden generated an operating profit margin of 9.26%, in line with the same quarter last year. This indicates that the company's costs have been relatively stable.
Zooming out, Darden has done a decent job managing its expenses over the last eight quarters. The company has produced an average operating margin of 11.3%, higher than the broader restaurant sector. On top of that, its margin has remained more or less the same, highlighting the consistency of its business. The company's profitability was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes tectonic shifts to move meaningfully. Companies have more control over their operating margins, and it signals strength if they're high when gross margins are low (like for Darden).EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Darden reported EPS at $1.59, up from $1.56 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-range EPS growth rather than short-term movements.
Between FY2021 and FY2024, Darden's adjusted diluted EPS flipped from negative to positive. Restaurants are arguably some of the hardest businesses to manage because of constantly changing consumer tastes, input costs, and labor dynamics, and these results show that the company is heading in the right direction. Profitability is vital for success in the restaurant sector.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Darden's free cash flow came in at $118.2 million in Q1, down 61.2% year on year. This result represents a 4.33% margin, 8.1 percentage points lower than its free cash flow margin in the same period last year.
Over the last two years, Darden has shown strong cash profitability, giving it an edge over its competitors and the option to invest organically, acquire other restaurant chains, reduce its debt load, or return capital to shareholders via share buybacks or dividends while keeping ample cash on hand for emergencies. The company's free cash flow margin has averaged 9.24%, quite impressive for a restaurant business. However, its margin has averaged year-on-year declines of 3.9 percentage points. Although we'd rather see free cash flow conversion increase, short-term fluctuations like this aren't a big deal.
Return on Invested Capital (ROIC)
Darden has a decent track record of investing in profitable projects and has the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average return on invested capital (ROIC) is 10.9%, slightly better than the broader restaurant sector.
We like to track ROIC because it tells us about a company’s prospects for profitable growth and its management team's ability to achieve it through capital allocation decisions such as organic investments, acquisitions, and share buybacks. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Darden's Q1 Results
With a market capitalization of $17 billion, a $192.1 million cash balance, and positive free cash flow over the last 12 months, we're confident that Darden has the resources needed to pursue a high-growth business strategy.
It was good to see Darden beat analysts' revenue expectations this quarter. That really stood out as a positive in these results. On the other hand, its gross margin sadly missed analysts' expectations and its EPS missed Wall Street's estimates. Overall, this was a mediocre quarter for Darden. The company is down 2.93% on the results and currently trades at $136.93 per share.
Is Now The Time?
Darden may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We have other favorites, but we understand the arguments that Darden isn't a bad business. Although its gross margins make it more difficult to reach positive operating profits compared to other restaurant businesses, the good news is its wonderful same-store sales growth has been among the best in the restaurant sector.
Darden's price-to-earnings ratio based on the next 12 months is 15.3x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Darden, it seems that it's trading at a reasonable price.
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