Darden (DRI)

Restaurant company Darden (NYSE:DRI) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 10.6% year on year to $3.27 billion. Its GAAP profit of $2.58 per share was 12.1% 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).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $12.08 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. For Darden to boost its sales, it likely needs to adjust its prices, launch new chains, or lean into foreign markets.

As you can see below, Darden grew its sales at a mediocre 6% 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 10.6%, and its $3.27 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 8.7% over the next 12 months, an acceleration versus the last six years. This projection is above the sector average and suggests its newer menu offerings will fuel better top-line performance.

Number of Restaurants

Darden sported 2,159 locations in the latest quarter. Over the last two years, it has opened new restaurants at a rapid clip by averaging 6.1% 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

A company's restaurant base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth at restaurants open for at least a year.

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 1.7% 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 4.6% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells, like ingredients, and indicate its level of pricing power.

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 21.5% gross margin over the last two years. Said differently, Darden had to pay a chunky $78.54 to its suppliers for every $100 in revenue.

Darden produced a 22.9% gross profit margin in Q2, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, 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 generally stayed the same, averaging 11.4% 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.

This quarter, Darden generated an operating margin profit margin of 11.7%, down 1.7 percentage points year on year. Since Darden’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

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 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 8.8% over the last two years, quite impressive for a restaurant business.

Darden’s free cash flow clocked in at $275.8 million in Q2, equivalent to a 8.4% margin. The company’s cash profitability regressed as it was 1.2 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’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? A company’s ROIC explains this by showing how much operating profit it makes compared 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 14.1%, impressive for a restaurant business.

Darden reported $240 million of cash and $5.86 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 $1.91 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 $82.5 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.

We enjoyed seeing Darden beat analysts’ same-store sales expectations this quarter. We were also happy its revenue was in line with Wall Street’s estimates. On the other hand, its EPS fell short of Wall Street’s estimates. Looking ahead, EPS guidance also came in below expectations. Overall, this was a weaker quarter. The stock remained flat at $221 immediately following the results.

Updated: July 10, 2025 at 10:32 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Darden, you should also grasp the company’s longer-term business quality and valuation.

Darden has a few positive attributes, but it doesn’t top our wishlist. Although its revenue growth was a little slower over the last six years, its growth over the next 12 months is expected to be higher. And while Darden’s gross margins make it more difficult to reach positive operating profits compared to other restaurant businesses, its new restaurant openings have increased its brand equity.

Darden’s P/E ratio based on the next 12 months is 19.8x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $230.05 on the company (compared to the current share price of $213.27).