Restaurant Giant Beats Wall Street With Latest Results

On Thursday morning, Orlando, Florida-based Darden Restaurants DRI released the firm's fiscal fourth quarter financial results. For the three-month period ended May 26, 2024, Darden posted an adjusted EPS of $2.65 (GAAP EPS: $2.58) on revenue of $2.957 billion. These top- and bottom-line results both beat Wall Street, while the sales print was good enough for year-over-year growth of 6.8%. The seven-cent-per-share adjustment was made for transaction and integration costs related to Ruth's Chris Steak House.

The sales growth was driven by the addition of 117 news restaurants, including 80 company-owned Ruth's Chris locations. For the quarter, same-store sales were flat from a year ago, with significant growth at LongHorn Steakhouse offset by contraction at Olive Garden, fine dining and the firm's other businesses. Perhaps the reason behind the stock's 1.3% move to the upside on Thursday morning, more than the actual performance, was the announcement of an increase in the firm's quarterly dividend paid to shareholders from $1.31 to $1.40 for a forward yield of 3.69%.

Same Store Sales

FQ4 2024:

• Darden-wide +/- 0.0%
• LongHorn Steakhouse +4.0%
• Other businesses -1.1%
• Olive Garden -1.5%
• Fine dining -2.6%

FY 2024:

• Darden-wide +1.6%
• LongHorn Steakhouse +4.7%
• Olive Garden +1.6%
• Fine dining -2.4%
• Other businesses -1.1%

The overall same store sales print for the quarter was a mild disappointment as some pedestrian growth had been expected. The firm noted that total sales for the year increased 8.6% to $11.4 billion, including the above-mentioned new stores. Darden will not include Ruth's Chris Steak House when figuring this item until this chain has been owned and operated by the firm for 16 months.

Guidance

For the full fiscal year 2025, which we are currently in the first quarter of, Darden sees total sales of $11.8 billion to $11.9 billion. This was a bit light, bringing the high end of the range below the $11.94 billion Wall Street consensus. Darden expects to open 45 to 50 new restaurants this fiscal year, while experiencing 1% to 2% same store sales growth excluding Ruth's Chris. The firm is now projecting adjusted EPS of $9.40 to $9.55 for the full year. This brings the midpoint of the range below the $9.55 that Wall Street was looking for.

Fundamentals

For the fiscal year just completed, Draden generated operating cash flow of $1.622 billion (+4.4%). Out of this number came capex spending of $601.2 million and purchases of capitalized software of $25.6 million. This left free cash flow of $995.2 million (+3.8%). Out of that number, the firm paid shareholders $628.4 million in cash dividends and repurchases $453.9 million share of common stock. That does leave a slightly negative imbalance and the firm did just increase the dividend. This could be easily remedied by repurchasing fewer or even no shares for the firm's treasury.

Looking at the balance sheet, Darden ended the period with a cash position of $194.8 million and inventories of $290.5 million to put current assets at $822.8 million. Current liabilities amount to $2.193 billion (uh oh), including $86.8 million in short-term debt, but also unearned revenues of $591.8 million. This puts the firm's current ratio at a dangerous-looking 0.38 and even when adjusted for unearned revenues, a still dangerous-looking 0.51. Given the nature of the business, there is no need to get into quick ratios, these current ratios are nasty enough.

Total assets amount to $11.323 billion, including just $1.391 billion in goodwill, which is not a problem. Total liabilities less equity comes to $9.081 billion including long-term debt of $1.37 billion and $3.705 billion in non-current lease-related liabilities.

I don't think it will surprise anyone when I say that I do not have a high opinion of this balance sheet. Debt swamps cash, the short-term (current) liabilities are just so huge relative to current assets. Making matters worse, $847.2 million worth of those current assets are simply entered under the word "other." OK, so it's not important enough to itemize shorter-term liabilities that come to more than four times the cash position and 103% of all current assets? Yikes. Things that make you go, "hmmm."

My Thoughts

The dividend hike has investors excited. The company is profitable and is expanding. There are positives. Cash flows are not bad at all. Cash flow and balance sheet management have to improve significantly and improve quickly at that. These fundamentals are a bit of a mess to look at. In addition to that, the guidance provided was a tad on the light side.

Don't forget: Though consumer-level inflation cooled to 3.3% annually in May on a flat month-over-month print, food prices away from home was up 0.4% monthly and 4% annually for May, while prices for food at home were flat monthly, in line with headline inflation and are up just 1% year over year.

Clearly with credit card delinquencies running at levels not seen since the "great recession," the consumer is going to have a difficult time in a decelerating economy with a slowly rising unemployment rate and a rapidly rising underemployment rate. Eating out and putting the meal on a credit card is going to become something that families just won't do as often in the near future as they had done in the past. Yes, that's my opinion, but it's probably more than an educated guess.

I would be slow in this environment to get long the stock of a restaurant chain that includes a large fine dining segment that has just been expanded, until the direction of the economy itself is more clear.

Readers will see that DRI had moved from a downward trend into a basing period in early May, finding support at just a couple of dollars below a key Fibonacci retracement level. Let's zoom in:

The stock is trying to break out of that flat base this morning with a $154 pivot. The stock has found $145 support that has been tested three times and held, and now stands with a much-improved daily MACD, and far less bearish reading for relative strength. This is the deal, gang. Technically, if the stock holds the 200-day SMA this morning, the bulls will have a ballgame. A failure there, and the 50-day SMA just below will almost surely be tried from above.

Though, fundamentally, I see no case to buy this stock, technically, if $154 can be held, a run at the March high of $176 is possible. I do not think that happens, but that is what the technicals say at this time.

At the time of publication, Guilfoyle had no positions in any securities mentioned.