Darden Restaurants: Is it serving up value?

Darden Restaurants is one of the largest full-service dining companies in the United States, operating well-known brands like Olive Garden, LongHorn Steakhouse, and The Capital Grille. Its scale, operational discipline, and strong brand portfolio have helped it navigate a competitive and often unpredictable industry. From steady same-restaurant sales growth to expanding off-premise channels and international franchising, Darden continues to adapt while maintaining a focus on long-term profitability. But with economic uncertainty, rising costs, and shifting consumer preferences, one question remains: Does this restaurant giant belong in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Darden Restaurants at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Darden Restaurants, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Darden Restaurants is one of the largest full-service restaurant companies in the world, operating 2.159 company-owned restaurants and overseeing 154 franchised locations. Its portfolio includes well-known brands such as Olive Garden, LongHorn Steakhouse, Ruth’s Chris, The Capital Grille, Yard House, and Cheddar’s Scratch Kitchen. The company was originally founded in 1968 as Red Lobster Inns of America, acquired by General Mills in 1970, and became a separate publicly traded company in 1995. Darden’s business benefits from its scale, which enables it to negotiate favorable supplier agreements, execute national advertising campaigns, and operate with a high degree of efficiency. Olive Garden remains a segment leader in Italian dining with industry-leading profit margins, and the company’s broad brand mix allows it to serve different consumer preferences across both casual and fine dining. Its strategic planning helps each brand stand out, ensures the different parts of the business work well together, and identifies ways to grow, so that every brand can perform well over the long term. The company generates significant and durable cash flows, thanks to strong restaurant-level profits and a well-run business model. Each location is carefully managed, with clear roles and high standards. Darden invests heavily in developing its people, with most restaurant leaders promoted from within. This leads to low staff turnover and consistent performance across its brands. A strong culture of employee engagement is central to the company’s identity, supported by programs like Darden Dimes and clear paths for internal advancement. Darden is using more technology and data to improve how it runs its business. This helps the company tailor its marketing to individual guests, make online interactions better, and run its restaurants more efficiently. Its supply chain is tightly managed through Darden Direct Distribution, making sure food and supplies are high quality, safe, and cost-effective. The company works with over 1.400 suppliers in more than 30 countries to keep everything running smoothly. Darden’s competitive moat lies in its scale, strong brand portfolio, operational discipline, strategic planning, and employee-centric culture, all of which reinforce each other to create a resilient and growing business in a highly fragmented industry.

Management

Rick Cardenas serves as the CEO of Darden Restaurants, a position he assumed in 2022 after a long and diverse career within the company. He began his journey with Darden in 1988 as a busser at a Red Lobster and steadily rose through the ranks, holding multiple leadership roles across finance and operations. Prior to becoming CEO, he served as Chief Financial Officer, where he played a central role in shaping the company’s strategic direction alongside his predecessor. His contributions included strengthening Darden’s operational focus, improving cost discipline, and using data and scale as levers for long-term growth. As CFO, Rick Cardenas was instrumental in several major acquisitions, including Yard House, Cheddar’s Scratch Kitchen, and Eddie V’s Prime Seafood. In 2024, he completed his second acquisition as CEO with the purchase of Chuy’s, reinforcing his commitment to disciplined M&A as a tool for capital allocation and brand diversification. Rick Cardenas holds a bachelor’s degree in Finance and Accounting from the University of Central Florida and an MBA from the Tuck School of Business at Dartmouth College. He is also a Certified Public Accountant and currently serves on the Board of Directors of Tractor Supply Company. His leadership style reflects a deep understanding of Darden’s culture and operations, rooted in decades of hands-on experience within the organization. When he was named CEO, his predecessor described him as one of the best strategic thinkers he had ever worked with. Rick Cardenas brings a rare combination of operational know-how, financial expertise, and long-term strategic vision. Given his track record and deep alignment with Darden’s core values, I am confident in his ability to lead the company through its next phase of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Darden Restaurants has consistently achieved a high ROIC outside of the pandemic years. First, Darden benefits from a strong and proven operating model that emphasizes cost discipline, high restaurant-level margins, and operational efficiency across a portfolio of well-established brands. Its scale allows it to negotiate favorable supplier terms, centralize functions, and leverage data to drive performance and reduce waste. Olive Garden in particular is a category leader with industry-best segment margins, which lifts overall returns. Second, Darden maintains a capital-light growth strategy by expanding cautiously and focusing on brand strength rather than chasing unit count at all costs. Its focus on internal promotions, efficient restaurant design, and targeted reinvestment helps keep capital expenditures aligned with expected returns, which supports high ROIC. Since the pandemic, ROIC hasn’t quite reached pre-pandemic levels. This is due to a combination of structural and transitional factors. Higher labor and food costs have compressed restaurant-level margins across the industry, and although Darden has managed these pressures better than most, they still weigh on profitability. At the same time, the company has increased capital spending on digital upgrades, restaurant remodels, and acquisitions like Ruth’s Chris and Chuy’s. These investments take time to pay off and have temporarily increased the capital base, reducing near-term ROIC. Newly acquired brands also tend to deliver lower returns initially compared to long-standing brands like Olive Garden and LongHorn, which means they modestly dilute overall returns until synergies are realized. Meanwhile, consumer behavior has become more fragmented post-COVID, traffic remains slightly below pre-pandemic levels in some segments, and fine dining in particular has been slower to recover in urban and office-heavy areas. Together, these factors help explain why ROIC remains strong but still below the highs achieved before the pandemic.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Darden Restaurants has managed to increase equity in most years over the past decade due to its consistently strong financial performance, driven by high restaurant-level margins, disciplined capital allocation, and steady earnings growth. The company generates significant and durable free cash flow, which it uses to reinvest in the business, pay dividends, and fund acquisitions. Equity peaked in fiscal year 2021 primarily because of temporary factors related to the pandemic. In response to the uncertainty in 2020, Darden raised capital and suspended share repurchases, which helped preserve and even grow equity during that period. However, as conditions stabilized, the company resumed returning capital to shareholders through buybacks, which can reduce equity depending on the balance between profits and repurchases. While equity has not quite returned to its fiscal 2021 peak, it has increased for three consecutive years and reached its second-highest level in fiscal year 2025. This recent growth reflects a strong post-pandemic recovery in earnings, contributions from acquisitions like Ruth’s Chris and Chuy’s.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Darden Restaurants reached its highest free cash flow in fiscal year 2025 because it had record sales and strong overall performance. Core brands like Olive Garden and LongHorn Steakhouse continued to grow, and the company also benefited from opening new restaurants and adding Chuy’s through an acquisition. Even with some cost pressures, Darden ran its business efficiently and kept spending in check, which helped turn more of its profits into cash. However, the free cash flow margin in 2025 was the lowest it has been since 2018, not counting the pandemic year. This happened mainly because costs for labor and ingredients were still high, which reduced the profit made on each sale. At the same time, Darden spent more on things like new technology, upgrading restaurants, and integrating new brands. These are smart long-term investments, but they reduce free cash flow margin in the short term. So even though the company made more cash overall, each dollar of sales produced less free cash flow than in most previous years. Darden Restaurants uses its free cash flow to return capital to shareholders through a mix of dividends and share repurchases, while also reinvesting in the business for long-term growth. In fiscal year 2025, the company returned a total of $1,1 billion to shareholders, including $659 million in dividends and $418 million in share buybacks. Dividends are a clear priority, and the company recently increased its quarterly payout by 7% to $1,50 per share, or $6 annually. This puts the dividend payout ratio at 58%, near the top of its target range of 50% to 60%. In addition to dividends, Darden also buys back shares to help offset dilution and boost shareholder returns. The free cash flow yield is at its lowest level in the past ten years, excluding the pandemic, which indicates that the shares are currently trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This can be calculated by dividing the total long-term debt by earnings. After performing this calculation for Darden Restaurants, I found that the company has 2,05 years of earnings in debt, which is well below the three-year threshold. In fact, Darden Restaurants has not had a debt-to-earnings ratio above three years in the past decade. Debt levels did increase in fiscal year 2025, mainly due to the acquisition of Chuy’s.  Even so, the current debt level remains well within a comfortable range, and the company continues to generate strong cash flows that support both reinvestment and debt repayment. Therefore, debt is not a concern for me when considering an investment in Darden Restaurants.

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Risks

Competition is a risk for Darden Restaurants because the company operates in one of the most crowded and fast-changing segments of the consumer economy. It faces constant pressure from a wide range of competitors, including national and regional full-service chains, fast-casual and quick-service restaurants, local independents, and even nontraditional players like supermarkets and meal delivery services. These rivals compete on price, food quality, convenience, service speed, location, and increasingly, digital capabilities like online ordering and delivery. This makes it harder for Darden to stand out and retain customer loyalty across all its brands. Consumer preferences are also shifting rapidly. Trends toward healthier eating, sustainability, convenience, and technology-driven ordering are forcing full-service restaurants to adapt quickly. If Darden’s brands fail to keep up with these changes, they risk losing relevance, especially among younger or more health-conscious diners. In addition, the growing dominance of delivery aggregators adds another layer of complexity, as these platforms can favor other restaurants through paid placements or user ratings, and may dilute Darden’s direct relationship with its guests. The company also competes for resources beyond customers. It must attract and retain qualified staff, secure prime real estate, and manage supplier relationships, often in the same markets as its rivals. Even with Darden’s scale and operational expertise, the industry’s low barriers to entry and easily copied business models mean that brand differentiation must be continually earned through consistent execution, menu innovation, and marketing.

Macroeconomic conditions are a risk for Darden Restaurants because many of the key factors that affect its business, such as food and labor costs, consumer spending, and energy prices, are outside of its control. In fiscal year 2025, the company continued to experience elevated inflation in areas like ingredients, wages, healthcare, and utilities. Food commodities such as beef, chicken, seafood, dairy, and produce remain volatile, and any significant price swing can materially affect operating margins. Labor costs have also been under pressure due to minimum wage increases in many states, rising healthcare benefit expenses, and a competitive labor market that pushes up pay across roles. Utility prices, particularly electricity and natural gas, have also fluctuated due to weather events, infrastructure issues, and broader energy market instability. Although Darden uses its scale to negotiate better prices and drive purchasing efficiency, persistent cost pressures across these areas can still compress margins, especially if consumer demand softens or if raising menu prices leads to reduced traffic. Consumer spending is also highly sensitive to the broader economic environment. When interest rates rise, inflation persists, or job growth slows, consumers tend to cut back on discretionary spending like dining out. Even small shifts in consumer confidence or household budgets can lead to fewer restaurant visits or smaller ticket sizes. This can have a direct impact on Darden’s sales, particularly in segments like casual dining where consumers are more price-sensitive. Fine dining brands are even more exposed, as they often rely on higher-income guests, corporate travel, and special occasions. During the pandemic, fine dining temporarily benefited from an influx of new guests, but many of those customers have since returned to pre-COVID spending habits. As of fiscal 2025, suburban fine dining traffic is running at roughly 95% of pre-pandemic levels, but urban locations are still lagging at about 82%, reflecting continued weakness in office-heavy areas and central business districts. This urban recovery gap highlights how macroeconomic shifts in work habits, tourism, and urban activity can materially affect the performance of certain parts of Darden’s portfolio.

Food safety is a risk for Darden Restaurants because even a single incident can damage customer trust, hurt brand reputation, and disrupt operations. While Darden dedicates significant resources to food safety protocols and quality control across its restaurants and supply chain, the company ultimately remains vulnerable to risks that may arise at any point, including during production, distribution, or handling at the restaurant level. These risks are especially difficult to manage because some factors, such as contamination at a supplier facility or in transit, are outside Darden’s direct control. Foodborne illnesses from bacteria like E. coli, salmonella, norovirus, or listeria can seriously affect both the people who get sick and the company responsible. Even if Darden has strong safety measures in place, just one incident can lead to headlines and viral posts online. Bad news spreads quickly on social media, often before the company has a chance to explain or fix the problem, which can hurt its reputation and make people think twice about eating there. There are well-known examples of how damaging food safety lapses can be. Chipotle suffered a multi-year sales decline and reputational setback after several foodborne illness outbreaks between 2015 and 2018, including E. coli and norovirus incidents linked to multiple locations. Despite strong brand loyalty, the company faced government investigations, lawsuits, and declining traffic for years. For Darden, a similar incident at any of its brands, whether Olive Garden, LongHorn Steakhouse, or a fine dining concept, could result in lost traffic, legal liability, increased operating costs, or changes in supplier relationships.

Reasons to invest

Takeout and food delivery is a reason to invest in Darden Restaurants because it’s becoming a bigger and more profitable part of the business. It helps increase sales, attract new customers, and encourage repeat visits, all without hurting profit margins. At Olive Garden, takeout sales grew nearly 20% year-over-year in fiscal 2025, thanks in part to successful promotions like “Buy One, Take One.” This offer let guests enjoy one meal at the restaurant and take another one home for as little as $14,99. Since it used Olive Garden’s existing $6 take-home setup, it was easy to execute and helped the brand outperform the rest of the industry in same-restaurant sales. Delivery also played a big role in boosting overall sales. Because Olive Garden made delivery available nationwide and supported it with targeted marketing, including a free delivery promotion partly paid for by Uber, weekly delivery orders nearly doubled by the end of the year. Darden has been careful to design its delivery model in a way that protects profits. Most of the delivery platform fees are passed on to Uber, and at the same time, the company benefits from larger average orders and more frequent visits from delivery customers. These guests are typically younger, have slightly higher incomes, and often include people who are new to Olive Garden or haven’t visited in a long time. This helps expand the brand’s reach beyond regular dine-in guests. Cheddar’s also saw positive early results with Uber Direct, showing that delivery could work well across other Darden brands, as long as they can maintain a high standard for the customer experience. Overall, the growing delivery channel not only adds more revenue, but also makes the brand more accessible and helps keep customers coming back, making it a solid long-term growth driver rather than just a short-term boost.

Opening new restaurants is a reason to invest in Darden Restaurants because it reflects the company’s commitment to long-term growth and its ability to gain market share in a fragmented industry. Darden takes a disciplined, data-driven approach to expansion, focusing on successful brands like Olive Garden and LongHorn Steakhouse and targeting markets where they already have a strong presence. By opening restaurants closer to where customers live and work, the company makes its brands more convenient and accessible, which drives traffic and loyalty. Each new location is carefully chosen based on factors like demographics, local competition, and ease of access, helping reduce the risk of poor performance and setting the stage for strong returns. In fiscal 2026, Darden plans to open 60 to 65 new restaurants, with growth expected to ramp up to over 3% annually over the next five years. The company has already built a strong pipeline of future locations and introduced updated restaurant designs for Cheddar’s and Yard House to support this growth. While many smaller chains and independent restaurants are slowing their expansion or closing altogether, Darden is gaining ground thanks to its financial strength, operational expertise, and access to capital. Over time, not only will core brands like Olive Garden and LongHorn continue to expand, but other brands in the portfolio are also expected to contribute more significantly to growth. This steady stream of well-planned openings supports revenue growth, increases brand visibility, and further strengthens Darden’s position as a leader in full-service dining.

International growth is a reason to invest in Darden Restaurants because it offers a long runway for expansion with minimal capital investment and strong early traction. The company is growing its global footprint through franchising, which allows it to scale without taking on the risks and costs of operating restaurants directly. A prime example is the recent agreement with Recipe Unlimited, Canada’s largest full-service restaurant operator, to convert eight existing Olive Garden locations into franchises and open 30 more over the next ten years. This deal leverages Recipe Unlimited’s deep local expertise to accelerate Olive Garden’s growth in Canada and improve local operations. Globally, Darden now has 154 franchised locations, including 91 outside the U.S., and its international franchising team is actively expanding. The acquisition of Ruth’s Chris added 74 franchised units to the portfolio, giving Darden the scale and revenue to invest in better systems and support for franchisees. This has already helped speed up international expansion. For instance, new agreements have been signed with partners in India and Spain to develop 40 Olive Garden restaurants in each country, as well as an agreement to open six Capital Grille locations in Asia. While these are early days, initial momentum is strong, and Darden is taking a measured, performance-based approach, franchisees must prove they can meet development commitments before expanding to additional regions. In the long run, this strategy creates an asset-light, high-margin stream of recurring revenue, diversifies geographic exposure, and lays the groundwork for introducing more Darden brands to international markets. With rising interest from global partners and no need to invest its own capital in the new units, Darden’s international growth strategy represents a compelling long-term opportunity for investors.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 8,88, which is from the fiscal year 2025. I have selected a projected future EPS growth rate of 9% (Finbox expects EPS to grow by 8,7%). Additionally, I have selected a projected future P/E ratio of 18, which is double the growth rate. This decision is based on the historical higher P/E ratio of Darden Restaurants. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $93,53. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Darden Restaurants at a price of $46,77 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 1.698, and capital expenditures were 645. I tried to review their annual report to calculate the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 452 in our calculations. The tax provision was 136. We have 117 outstanding shares. Hence, the calculation will be as follows: (1.698 – 452 + 136) / 117 x 10 = $118,12 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Darden Restaurants' free cash flow per share at $9,01 and a growth rate of 9%, if you want to recoup your investment in 8 years, the Payback Time price is $108,31.

Conclusion

I find Darden Restaurants to be an intriguing company with a good management. It has built a moat through its scale, strong brand portfolio, operational discipline, strategic planning, and employee-focused culture. The company has consistently delivered high returns on invested capital, excluding the pandemic, and reported its highest free cash flow ever in fiscal 2025. Still, it faces risks. Competition is intense in a crowded and fast-evolving industry where Darden must contend with full-service chains, fast-casual formats, independents, and even supermarkets and delivery platforms. Staying relevant amid shifting consumer preferences and digital disruption requires constant adaptation. Macroeconomic conditions are also a risk, as food, labor, and utility costs, along with fluctuations in consumer spending, can quickly squeeze margins, particularly in fine dining and urban areas. Food safety remains a key concern because even a single incident, despite robust controls, can erode trust and trigger lasting reputational and financial damage. On the upside, takeout and delivery are growing profitably, expanding Darden’s reach and driving frequency without hurting margins. Strong performance at Olive Garden and Cheddar’s suggests long-term potential across more brands. The company is also investing in growth by opening new locations in carefully selected markets, reinforcing its leadership in full-service dining while smaller competitors retreat. International expansion via franchising adds another attractive layer, offering high-margin, asset-light growth with early momentum in Canada, India, and Spain. While there’s a lot to like about Darden Restaurants, it’s not currently a sector I want to invest in, so I will not be buying shares.

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