Darden (DRI)

Restaurant company Darden (NYSE:DRI) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 10.4% year on year to $3.04 billion. Its non-GAAP profit of $1.97 per share was 2% below analysts’ consensus estimates.

Company Overview

Founded in 1968 as Red Lobster, Darden (NYSE:DRI) is a leading American restaurant company that owns and operates a portfolio of popular restaurant brands.

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).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $12.36 billion in revenue over the past 12 months, Darden is one of the most widely recognized restaurant chains and benefits from customer loyalty, a luxury many don’t have. Its scale also gives it negotiating leverage with suppliers, enabling it to source its ingredients at a lower cost. However, its scale is a double-edged sword because it’s harder to find incremental growth when your existing restaurant banners have penetrated most of the market. To expand meaningfully, Darden likely needs to tweak its prices, start new chains, or enter new markets.

As you can see below, Darden grew its sales at a mediocre 6.3% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it barely increased sales at existing, established dining locations.

This quarter, Darden’s year-on-year revenue growth was 10.4%, and its $3.04 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7% over the next 12 months, similar to its six-year rate. This projection is above the sector average and suggests its newer menu offerings will help maintain its historical top-line performance.

Number of Restaurants

A restaurant chain’s total number of dining locations often determines how much revenue it can generate.

Darden sported 2,165 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 6% annual growth, among the fastest in the restaurant sector.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Darden’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.6% per year. This performance suggests it should consider improving its foot traffic and efficiency before expanding its restaurant base.

In the latest quarter, Darden’s same-store sales rose 4.7% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

Darden has bad unit economics for a restaurant company, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 21.6% gross margin over the last two years. That means Darden paid its suppliers a lot of money ($78.37 for every $100 in revenue) to run its business.

Darden produced a 20.5% gross profit margin in Q3, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Darden’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 11.6% over the last two years. This profitability was solid for a restaurant business and shows it’s an efficient company that manages its expenses well. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Darden’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Darden generated an operating margin profit margin of 11.1%, up 1.4 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Darden’s full-year EPS grew at a remarkable 33.1% compounded annual growth rate over the last five years, better than the broader restaurant sector.

In Q3, Darden reported adjusted EPS of $1.97, up from $1.75 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects Darden’s full-year EPS of $9.78 to grow 11.4%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Darden has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 9% over the last two years, quite impressive for a restaurant business.

Darden’s free cash flow clocked in at $168.4 million in Q3, equivalent to a 5.5% margin. This cash profitability was in line with the comparable period last year but below its two-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Darden hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 14.6%, impressive for a restaurant business.

Darden reported $211 million of cash and $6.16 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.08 billion of EBITDA over the last 12 months, we view Darden’s 2.9× net-debt-to-EBITDA ratio as safe. We also see its $92.6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

EPS missed and Darden's full-year EPS guidance came in below expectations. Overall, this print was mediocre. Shares traded down 7% to $194.22 immediately following the results.

Updated: December 4, 2025 at 9:44 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Darden.

Darden isn’t a bad business, but we have other favorites. Although its revenue growth was mediocre over the last six years, its new restaurant openings have increased its brand equity. Investors should still be cautious, however, as Darden’s projected EPS for the next year is lacking.

Darden’s P/E ratio based on the next 12 months is 16.4x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $221.10 on the company (compared to the current share price of $176.27).