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Darden's Cooking with Gas

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Results well-done despite chilly economy.

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Restaurants of all stripes are having a tough time these days. Two reasons: Rising food costs and consumers' growing reluctance to spend money.

In spite of this doomsday atmosphere, Darden (DRI), which operates such major brands as Olive Garden, Red Lobster and Longhorn Steakhouse, had a surprisingly good fourth quarter, with earnings from continuing operations finishing 3 cents above the 75 cent average expected by market analysts.

Sales from continuing operations totaled $1.83 billion, roughly 25% more than the $1.46 billion Darden reported for last year's fourth quarter sales. Per quarter dividends also increased, from 18 to 20 cents.

While reported sales were only marginally greater than the $1.82 billion projected by analysts, any upbeat news in a downbeat economy has the potential to draw in institutional investors and generate positive sell-side research. Either outcome could drive the stock.

Here's what's particularly impressive to me: Darden's U.S. same-restaurant sales at Olive Garden are up 5.8% - a remarkable jump, given the fact that Olive Garden's U.S. comparable sales increased 3.5% in last year's fourth quarter. Since Olive Garden represents about 43.7% of the firm's total sales, this is a significant number.

To give you a small taste of how the competition has been faring: In 2008's third quarter, the Chili's brand, which is operated by Brinker International (EAT), reported a 1.6% increase - which would be respectable, if the chain hadn't declined 4.4% in the third quarter of last year.

The increase in per-quarter dividends -- by 2 cents, or 11% -- is scarcely earth-shattering. However, it's a clear indication that management has real confidence in the company's wherewithal - confidence which could, in turn, cause institutions and retail shareholders to flock to the stock.

The restaurant industry, of course, is never predictable. What's cooking now might not be a week, a month or a year down the road.

Darden closed at $33.76, up $2.16 or 6.84% on the day.

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No positions in stocks mentioned.

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