Darden has been treading water for the past six months, recording a small loss of 4.2% while holding steady at $204.59. The stock also fell short of the S&P 500’s 11.8% gain during that period.
Is now the time to buy Darden, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Darden Not Exciting?
We’re sitting this one out for now. Here are three reasons we avoid DRI, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Darden’s 6.5% annualized revenue growth over the last seven years was mediocre. This fell short of our benchmark for the restaurant sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Darden’s revenue to rise by 3.6%, a slight deceleration versus This projection is underwhelming and implies its menu offerings will see some demand headwinds.
3. Low Gross Margin Reveals Weak Structural Profitability
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 21.8% gross margin over the last two years. That means Darden paid its suppliers a lot of money ($78.23 for every $100 in revenue) to run its business.
Final Judgment
Darden isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 18.3× forward P/E (or $204.59 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d suggest looking at the most dominant software business in the world.
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