Here’s Why It Is Possible For Olive Garden To Survive A Recession. 

The Olive Garden is an attractive place to enjoy a heaping bowl of fettuccine Alfredo and a basket of breadsticks during a time when economic concerns might make dining out seem like a luxury. Darden Restaurants DRI +1.07 % stock may even prove tastier in the coming months.

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Taking into account the company's 80 restaurants, Darden (ticker: DRI) has no perfect time to be in business. Some of its brands include Olive Garden, LongHorn Steakhouse, Cheddar's, Capital Grille, and Bahama Breeze. Consumers' spending power is crimped by inflation, which is still near multidecade highs, and ingredients and labor are more costly. The Federal Reserve aims to slow the economy, and consumers may feel that eating out is unaffordable in the event of a recession.

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Despite these headwinds, Darden should be able to weather them. By keeping a close eye on costs, the company has been able to keep price increases below inflation while maintaining strong brand awareness. Despite other restaurant brands possibly struggling, Darden looks like a quality investment next week with a strong quarter likely to report.

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Raymond James analyst Brian Vaccaro says their brands are among the strongest in casual dining. Additionally, I believe they maintain a strong balance sheet and they are best-in-class operators."

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As a result, Darden was able to take advantage of both good and bad years. A nine-year gain in 2022 ended with its shares falling 8.2%, the most significant decline since 2007. Darden shares are currently up 6.7% this year, while the S&P 500 has gained 2.1%. The stock outperformed the S&P 500 SPX +1.65%, which fell 19.4% during the same period.

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Financial results for Darden's second quarter ended Nov. 27 exceeded Wall Street expectations, with earnings per share of $1.52 and sales of $2.5 billion. Additionally, the company opened 35 new restaurants compared to a year ago, resulting in a 7.3% increase in same-store sales. Although Darden raised prices slower than inflation, it managed to beat expectations. Approximately 6.5% of all prices rose, 1.5 points less than the 8% growth in the consumer price index.

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According to Darden CEO Ricardo Cardenas, the company has achieved these results because the company is pricing below its competitors, pricing below inflation through other cost savings, and offering our consumers a great value, so a promotional message is not necessary.”

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Promotions are still used to get people in the door by the company. In Olive Garden, for example, customers can choose unlimited pasta and sauces for a one-time fee. Despite the higher price in 2022, this promotion still provided customers with a "sale" since the margins were better. Since Olive Garden accounts for nearly half of the company's revenue, Darden has been able to maintain profit margins above 20% by keeping costs low -- marketing costs have fallen to 1%, from 3% before Covid.

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Stephen Zagor, an adjunct professor at New York University's Steinhardt School and professor at Columbia Business School says standardization, understanding logistics, and minimizing costs are the goals. Companies like Darden excel in this area, and you will find very few others who can compete with them."

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As a result, Darden is going to try again. According to analysts, it will report earnings of $2.23 a share on sales of $2.7 billion on March 23. Tower also forecasts Darden's full-year earnings guidance to edge up to $8 from $7.60, while acknowledging looming risks despite steady spending from consumers.

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There is a good reason why Darden stock fetches a premium, but it isn't cheap. As of this writing, its shares are trading at 17.8 times current-year earnings estimates, near its historical average, but significantly higher than those of Restaurant Brands Global DIN -0.59%  (DIN), which operates Applebee’s and IHOP and trades at 9.7 times earnings, and Bloomin’ Brands (BLMN), a steakhouse chain, and trades at 8.5 times earnings. Although Darden's market share is growing, it has strong margins and a strong balance sheet, so the valuation is justified.

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Rather than Coca-Cola KO +0.37% (KO) and PepsiCo PEP -0.10% (PEP), it might be better to compare TJX Co (TJX) and Tractor Supply (TSCO), which are all valued at at least 20 times earnings.

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“Since Darden's valuation is lower, with a growth profile that is expected to be faster over the next several years, we believe it is appropriate to compare it to either quality growth consumer companies or the S&P 500," writes Francfort, who targets the stock for $170, up 15% from Wednesday's close.

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The Olive Garden breadsticks might not be as exciting as that.