3 Reasons to Avoid DRI and 1 Stock to Buy Instead

Darden has been treading water for the past six months, recording a small return of 3.5% while holding steady at $207.34.

Is there a buying opportunity in Darden, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is Darden Not Exciting?

We're swiping left on Darden for now. Here are three reasons why we avoid DRI and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Darden’s 6% annualized revenue growth over the last six years was mediocre. This was below our standard for the restaurant sector.

2. Same-Store Sales Falling Behind Peers

Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.

Darden’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.7% per year.

3. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

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 21.5% gross margin over the last two years. That means Darden paid its suppliers a lot of money ($78.54 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. That said, the stock currently trades at 19.3× forward P/E (or $207.34 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.

Stocks We Would Buy Instead of Darden

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