The Darden Restaurants will announce on Thursday their fiscal revenues for the fourth quarter, which will provide investors with additional insights about the pandemic’s rebound in full-service restaurants.
Darden is trading at roughly 33 times its forward earnings, making it expensive in comparison to its rivals’ stocks. For example, the Cheesecake Factory is trading at 25 times forward earnings, while Ruth’s Hospitality Group is trading at 22 times.
Indeed, Darden’s most recent earnings report in March exceeded Wall Street analysts’ estimates by 42 percent.
Since Darden’s last report, analysts polled by Refinitiv have revised their fiscal fourth-quarter earnings estimates by an average of 13%. Almost half of those changes have occurred in the last month. According to Refinitiv, Wall Street now expects earnings per share of $1.78 on revenue of $2.19 billion.
In March, the company told investors that it expected total sales of $2.1 billion in the fiscal fourth quarter and earnings per share from continuing operations of $1.60 to $1.70. It is unclear whether the company will provide investors with a full-year forecast for fiscal 2022 or only the next fiscal quarter.
Investors should keep the following three key areas in mind as Darden releases its results:
Consumer preference: eat-in or take-out
As the economy recovers, consumers’ spending habits are shifting toward dining and travel. That has been beneficial to the restaurant industry.
According to BlackBox Intelligence, the industry’s same-store sales increased by 33% during the week ended June 6 compared to the previous year, when same-store sales fell by more than 20%. According to data from the United States, consumers have returned to spending more money on dining out rather than eating in over the last two months. Bureau of the Census
Even as the industry as a whole recovers, full-service restaurants lag behind those in the fast-food sector. Darden, which only owns casual and fine dining restaurants, suffers as a result.
Because of their reliance on business customers, the company’s fine-dining chains, such as The Capital Grille, have been particularly challenged throughout the pandemic. Many employees in the United States continue to work remotely, and business travel remains low.
Many urban areas are also recovering at a slower pace. For the week ending June 6, Black Box Intelligence data shows declining same-store sales for full-service restaurants in cities such as Washington and San Francisco. Darden CEO Gene Lee stated last year that the company was losing millions of dollars in sales at its New York City restaurants, including a 94 percent drop in sales at the Olive Garden in Times Square.
Bringing back employees to the workplace
In a note to clients on Monday, JPMorgan analyst John Ivankoe identified labor availability as the No. 1 risk to further restaurant sales recovery. Restaurant operators across the industry are opening or closing locations later or earlier, citing a lack of willing workers.
Darden executives stated last quarter that they are addressing the issue by spending approximately $17 million to provide hourly restaurant workers with a one-time bonus and raise wages. Every hourly employee at its restaurants now earns at least $10 per hour, including tips.
Darden will raise hourly wages to $11 in January 2022. They will be raised to $12 per hour in January of the following year.
Investors will want to know if those steps were sufficient to entice workers, or if Olive Garden and The Capital Grille will be understaffed as a result of employees choosing higher-paying jobs.
Food prices are rising.
Aside from labor costs, another major expense for restaurants is rising: food.
Shortages, shipping delays, and the shift away from supplying grocery stores are putting strain on the industry’s supply chain and driving up the cost of ingredients for restaurants.
In a note to clients last Wednesday, Wedbush analyst Nick Setyan stated that he was not concerned about Darden’s food costs due to existing contracts with suppliers. Furthermore, the company’s size gives it a negotiating advantage, and its basket of ingredients across its chains is more diverse than that of a fried chicken or burger chain.
However, investors should keep an eye out for the company’s forecasts for the duration and magnitude of rising commodity prices. If the short-term inflation outlasts the company’s expectations, it may be forced to pass on costs to customers or face margin pressure.