Will Darden restaurants disappoint investors on Thursday?
Dard Restaurants ( DRI 2.45% ) shareholders have watched the broader market over the past year as Wall Street soured on its outlook for a rebound from the COVID-19-related shutdowns. The owner of popular chains such as Olive Garden and LongHorn Steakhouse is also facing new challenges, including food price inflation, rising labor costs and staff shortages.
These issues could combine to make Darden’s third fiscal quarter look weak compared to its latest quarterly announcements. But the broader business trends are positive. Let’s take a closer look at the announcement scheduled for March 24.
The sales forecast
In mid-December, management issued a bullish outlook for the period after same-store sales jumped 34% in the second quarter. Those gains were spurred by weak results a year earlier, when pandemic shutdowns were still hurting sales. But Darden has consistently grown sales at an annual rate of around 10% on a two-year basis, mitigating the impact of these temporary closures.
Most investors expect sales to reach around $2.1 billion this quarter, up more than 30%. Reaching that number should be considered a success, especially since Darden did not predict the sharp rise in omicron variant cases when it released its third-quarter fiscal outlook. If that number is missing, management will likely cite the pandemic, as well as the struggle to maintain fully staffed restaurants.
Lead with value
Diners expect a trip to Olive Garden to cost more than a trip to a fast food chain. Yet they remain sensitive to price increases, especially when inflation picks up. A big question in Thursday’s report is to what extent Darden has been able to pass on its rising costs to consumers. Labor expenses, food costs, and marketing expenses have all increased over the past six months, and the company needs to offset those spikes with higher menu prices and cost reductions elsewhere in the business. ‘business.
Track the company’s adjusted profit margin for signs of trouble here. That metric hit 15% of sales last quarter, but management warned of weaker results in the near term as the company prioritizes sales growth over profit gains. “We continue to execute our pricing strategy significantly below our overall inflation to strengthen our value leadership position,” Chief Financial Officer Raj Vennam said on the second quarter conference call.
With the fourth fiscal quarter having already begun, management will have a clear reading of where sales will land for the full year. Prior to the announcement, executives had issued a wide range of potential results, with sales ranging between $9.55 billion and $9.7 billion. Reaching the top of that outlook would put the chain at more than 10% sales gains from pre-pandemic levels. The lower number represents a slower 9% increase over the past two years.
Leaders are expected to narrow that range on Thursday, while likely lowering near-term earnings expectations due to accelerating inflation. As for new goals for 2022 and beyond, shareholders will be eager to hear from new CEO Ricardo Cardenas, who will take over at the end of May, about Darden’s expansion plans going forward.
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