Jacob Sonenshine

Darden Restaurants stock has surged to new highs, managing to avoid getting caught up in the broader market's decline. If the owner of Olive Garden, Ruth's Chris Steak House, and other chains keeps executing well, shares could continue their march higher.

For starters, the S&P 500 is down just over 4% this year, and 9% below a record high set in February. President Donald Trump's tariffs threaten to lift the cost of imported goods, consumer prices, and lower consumer demand. Businesses and consumers have already become highly uncertain about the economy, causing markets to fear that spending in the economy will drop off.

Darden's stock has sidestepped the worries. It's up just over 9% this year, hit a record high this week, and even eked out a small gain Thursday, while the S&P 500 dipped. Much of the shares' 2025 gain came last week, when Darden reported a strong fiscal third quarter and issued guidance that indicates that consumers are still more than willing to eat out at its locations -- even through their worries about the economy.

Darden revealed that sales in the quarter grew just over 6% year over year to $3.16 billion. To be sure, this missed expectations by a few million dollars, but that's because of inclement weather and a shorter-than-usual Thanksgiving period, management explained. Without those headwinds, the same-store-sales growth of 0.7% would have been 2.6%. The rest of the growth came from a few new restaurant locations across the company's chains, and the addition of Chuy, a Mexican chain Darden bought last year. Earnings per share of $2.80 met expectations.

Darden is weathering the current climate better than peers. Cheesecake Factory saw just-over 1% same-store sales growth in its fourth quarter, and Outback Steakhouse owner Bloomin' Brands and IHOP owner Dine Brands Global have been seeing declines.

Darden management said on the earnings call that it expects fiscal-fourth-quarter sales of $3.25 billion, which implies a year-over-year increase of just over 9%. Analysts expect calendar 2025 sales of $12.7 billion, according to FactSet, for growth of just over 7%. While Olive Garden -- Darden's largest segment -- is seeing less growth than the rest of Darden, the LongHorn Steakhouse chain has continued to power overall growth. Analysts expect LongHorn to see 8% sales growth this year to $3.16 billion as the company adds more locations and generates a few percent of same-store-sales increases. That makes sense, given consumers' recent desire for more protein.

The focus on protein is also why Olive Garden's growth could be even better this year. "We believe Olive Garden (44% of sales) same-store-sales growth has accelerated to 3% with the help of increased price-point marketing -- including more protein-forward options," Evercore analyst David Palmer writes.

Profits could jump. Even though the company mentioned that it will need higher capital investments for new restaurants, analysts expect sales to grow faster than expenses. Analysts forecast that profit margins will tick higher over the coming two years, helping send earnings per share up 11% annually over the coming three years to $12.64 by 2027.

This can send the stock higher, if a couple factors unfold positively. The U.S. economy must sidestep recession, and see continued growth of consumer spending, which could happen if the Federal Reserve ultimately cuts interest rates. Plus, Darden needs to continue to meet earnings estimates and provide healthy guidance to convince investors that the company can continue to grow profits at a brisk clip.

Darden has a record of satisfying the market, beating earnings estimates in 16 of the past 20 quarters. The average stock movement after the last four earnings reports has been a gain of just over 7%.

If that trend continues, the higher earnings could lift shares. Darden stock trades at just under 20 times expected earnings for the coming 12 months, a tick below the S&P 500's multiple of almost 21 times. Historically, Darden shares trade close to the index's multiple, and sometimes above. This isn't the cheapest shares have ever been versus the index, but the valuation is reasonable -- so long as the company keeps growing quickly.

More stock gains hinge on execution from here.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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March 30, 2025 03:00 ET (07:00 GMT)

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