Darden Restaurants (NYSE: DRI) shares were 7% lower following the company's fiscal Q1 earnings report which showed the company missing analysts' estimates on the top line but slightly beating on the bottom line. Darden has struggled in 2022 with an 18% YTD loss as it faces a challenging mix of circumstances including a tight labor market, rising food prices, and a consumer that is struggling with inflation.
These themes were evident in Darden's recent quarter as the company offers investors insight into the discretionary spending habits of a certain demographic. And, it's clear that they are cutting back on spending due to increased expenditures on areas like food, rent, gasoline, and utilities. Despite these challenges, Darden has to appeal to investors given its attractive valuation and ability to better withstand these adverse conditions than its competitors and smaller operators.
Inside the Numbers
In its fiscal Q1, Darden Restaurants reported earnings per share of $1.56 which was in line with expectations, and revenue of $2.45 billion which fell short of expectations of $2.47 billion. This was a 6% increase in revenue, although some of this was due to promotions. Earnings per share were down about 12% from last year.
Darden's strategy is to draw customers by pricing below its competitors. In essence, it's absorbing some of the higher costs rather than passing them on to customers.
For the quarter, Olive Garden same-store sales were up 2.3% vs expectations of 5.4%. Similarly, LongHorn Steakhouse also missed at 4.2% vs 5.1%. Overall, same-store sales were up 4.2% due to outperformance from fine dining.
The company did reiterate its forecast for 2023 and said that it expects inflation to cool off in the coming quarters. It sees earnings per share between $7.40 and $8. It sees revenue between $10.2 billion and $10.4 billion with same-store sales growth between 4% and 6%. Darden anticipates opening between 55 to 60 new restaurants in 2023.
It also sees inflation of 6% next year with the gap between menu prices and costs narrowing in 2023. If it's wrong about the inflation forecast, then the company would be willing to raise menu prices.