The restaurant industry might be one of the last areas an investor will consider when looking for steady growth. Many of these businesses struggle to post strong earnings during the best of times, and a potential recession on the way might mean even weaker growth.
But some restaurant chains are better equipped than others. Darden Restaurants (DRI 0.63%), owner of the Olive Garden and LongHorn Steakhouse brands, recently announced solid operating results through late August. Management is bullish about the rest of 2022 as well, despite the challenges facing the industry.
Let's look at whether these wins make Darden a tasty investment choice right now.
Growing sales
Darden's revenue increased 6% to $2.4 billion in its fiscal first quarter. These gains came from a healthy balance between an expanding store footprint (34 new restaurants) and rising sales at existing locations (up 4.2%).
That last figure put Darden near the top of the industry in terms of same-store sales growth. Fast-food giant McDonald's announced a 3.7% revenue uptick in its U.S. segment, for context.
The growth was spread across each of its franchises, too. "I am pleased with the performance of all our brands in what remains a challenging inflationary and uncertain macroeconomic environment," CEO Rick Cardenas told investors.
Margins and cash flow
Darden isn't immune to the cost challenges hitting the industry. Expenses jumped in areas like labor, food costs, and marketing. Yet, the company cut expenses in other parts of the business so that overall operating income remained solid.
Operating profit was $244 million, or 10% of sales, compared to $280 million, or 12% of sales a year earlier. Darden's national footprint and diverse portfolio of chains helps it stand out in this key investing metric.
NYSE: DRI
Key Data Points
Cash flow was similarly strong, allowing Darden to continue investing in new restaurant launches, marketing, and other long-term growth initiatives. The company pays a hefty dividend that currently yields nearly 4%.
Is it a bargain?
It's not hard to see how that income payment could help cushion investors' returns over the next few quarters, even if economic growth continues to slow toward a recession. Darden has made it through previous downturns without too much struggle, including by adjusting its menus to focus more on value products and to-go orders.
But the best reason to like this stock is that Darden has room to continue opening new restaurants even as it gains more traffic at existing locations. The company is aiming for as many as 60 launches this year, and that plan hasn't been changed by the weakening sales environment. Same-store sales growth should land between 4% and 6%, management said in mid-September.
These factors, plus a growing dividend, should have investors thinking about starting a position in Darden, or at least keeping the stock on their watch lists.
Sure, an economic downturn would hurt its short-term growth and earnings prospects. But Darden is outgrowing the industry right now while maintaining double-digit profitability. These wins should help it endure any demand slump while amplifying returns during the inevitable rebound.
