Darden’s Earnings Underwhelm, Stock Overdelivers
Who knew lukewarm pasta and cooling inflation could cook up a 10% stock surge?
Darden Restaurants just served up its latest quarterly earnings, and while the results were a little underdone, investors didn’t return their shares to the kitchen. Despite a revenue and earnings miss, shares popped 10% in pre-market trading.
Why? Well, when inflation starts cooling, and the Fed is dangling a jumbo rate cut like Olive Garden’s never-ending breadsticks, even a lukewarm bowl of pasta starts looking like a comeback story. After a year that’s been as unpredictable as your drunk uncle’s cheap chianti-fueled rants, slowing inflation and lower rates might just be the secret ingredients Darden, and the broader restaurant sector, have been waiting for.
WHAT HAPPENED
Darden, the corporate puppet master behind Olive Garden, LongHorn Steakhouse, and The Capital Grille, didn’t exactly wow anyone in its fiscal first quarter. Earnings per share hit $1.75, below Wall Street’s anticipated $1.83, and revenue just missed the $2.8 billion mark, clocking in at $2.76 billion. Like the brisket at LongHorn, it’s not exactly great, but also not a total disaster.
Olive Garden, the beloved carbohydrate engine of Darden’s portfolio, saw same-store sales drop 2.9%, proving even unlimited breadsticks have a cap. Over in fine dining—home to Eddie V’s and The Capital Grille—the decline was even more brutal, with a 6% dip in same-store sales, signaling that corporate expense accounts aren’t the explosive money machines they were before COVID and inflation crashed the party. The one shining beacon? LongHorn Steakhouse is somehow still grilling up success with a 3.7% increase in same-store sales. But, alas, it wasn’t enough to offset the overall mediocrity.
Still, Darden decided to throw some breadcrumbs of optimism, reaffirming its full-year guidance with earnings per share expected between $9.40 and $9.60, and total sales projected at $11.8 billion to $11.9 billion. Honestly, not the wildest bet.
WHY IT MATTERS
So why did the stock pop 10% despite Darden serving up numbers that are about as exciting as a microwaveable entrée? Cue the magic words: slowing inflation. As price growth cools and consumers start holding onto fewer pennies like their lives depend on it, restaurants like Darden might finally see some daylight. Inflation has been the ghost pepper in everyone’s soup lately, but if the Fed keeps those rate cuts coming, the cost pressures squeezing Darden’s margins might ease up.
And it’s not just Darden feeling the pinch now but licking its lips for the future. The AdvisorShares Restaurant ETF (EATZ)—yeah, that’s a real thing—tracks the industry’s key players and is up about 12% year-to-date. So investors clearly see potential in the sector that’s been stuck in a pressure cooker for months. Sure, it’s been a rough ride for most restaurant chains this year, but with inflation easing and a consumer-friendly environment on the horizon, a rebound could be coming.
Not that it’s all Olive Garden pasta and LongHorn steaks. There’s always a fish rotting somewhere, and in this case, it’s Red Lobster, whose bankruptcy is stinking up the dining sector as a cautionary tale. Even Chipotle and Domino’s—typically fast-food royalty—are juggling higher costs and inconsistent traffic like a line cook in the weeds.
Just last month, Brinker International (the corporate overlord of Chili’s and Maggiano’s) stumbled hard, missing earnings expectations for its fiscal year and projecting a weaker future. Brinker’s stock immediately nosedived 13%. But here’s the kicker: the stock is still up over 80% this year. So, like a server walking a burger with a knife in it, Brinker shrugged off the loss because value investors saw an opportunity and sent it skyrocketing 77% since April. Go figure.
With inflation cooling and more rate cuts on the table, Darden’s portfolio—from fancy-pants dining to the trusty LongHorn Steakhouse—gives it an edge. But let’s not get ahead of ourselves. Don’t expect it to pull off a Brinker-level explosion with its stock price still more than double that of its Chili’s-powered rival.
WHAT’S NEXT
Darden’s next steps? Juggling core brands while folding in recent acquisitions like Chuy’s and Ruth’s Chris. And yes, for the umpteenth time, if inflation continues to cool, rates drop, and consumers start loosening their belts (literally and financially), these brands could cushion Darden’s bottom line.
As for the broader restaurant scene, keep an eye on EATZ. It offers a buffet of fast-casual brands like CAVA, which defied inflationary odds and crushed it with its IPO. EATZ’s performance year-to-date shows investors are already eyeing a sector comeback. Bottomless pasta bowls, anyone?