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Darden
Restaurants will report fiscal-fourth-quarter results next week, and there’s no shortage of investor food for thought. Casual dining has seen a resurgence as consumers’ concerns about Covid-19 wane, but worries about inflation taking a bigger bite out of Americans’ discretionary spending has been a major catalyst for recent market selloffs.
For its part, Citigroup argues that Darden (ticker: DRI) needs to hit four targets for the stock to move higher—and they all look achievable.
Consensus calls for the parent of Olive Garden to earn $2.22 per share on $2.54 billion in revenue in the quarter; that would mark an increase from the year-ago period, when the company reported EPS of $2.03 on revenue of $2.28 billion.
Analyst Jon Tower thinks Darden can deliver “a clean earnings beat” on both the top and bottom line, as well as offer guidance for the upcoming fiscal year of sales above $10 billion and EPS between $7.50 and $8. Darden lowered its full-year outlook when the company reported in March.
Yet those aren’t the only two factors that will move the stock. Tower argues that in order for Darden shares to move higher, the company will also have to reassure investors that there won’t be any change to the pace of restaurant growth in the coming year of roughly 3%. It will also have to update the long-term-earnings algorithm to show “modest” expansion of earnings before interest and taxes, based on that new-restaurant growth.
Tower argues that Darden can meet all four of those marks, leading him to reiterate a Buy rating, although he lowered his price target to $134 from $160, after he tweaked his full-year earnings estimates lower to “reflect modestly lower sales and higher cost pressures.”
Of course, with the outlook for consumers so tenuous in light of high inflation, all eyes will be more on Darden’s outlook than its quarterly results. Tower writes that top-of-mind for investors will be commentary on how consumers have altered their behavior at Olive Garden amid budgetary pressures. They will want to know what plans the company has in place to spur traffic if it were to fall, or other levers Darden could pull if demand weakens amid a softer economic backdrop.
Taking a longer-term view, it’s hard to argue against Darden. The company’s huge scale meant that it was able to better weather the last downturn, and actually gain market share. Given how greatly Covid impacted smaller restaurants, companies still standing—like Darden—would appear to be better positioned to command an even larger portion of the pie. In addition, so far consumers appear willing to keep dining out—not only because they missed doing so during the pandemic, but because the cost of buying food at the grocery store has also shot up in tandem with menu prices.
That said, it remains a tossup as to how the stock will react to earnings. Investors have become increasingly wary of the consumer-discretionary space in general recently, and even aside from inflation and related concerns, there are worries that the ongoing popularity of hybrid working and labor shortages could weigh on the near-term outlook for casual dining.
Still, the market has rewarded success stories in the space, so if Darden can indeed offer a strong report and reassure investors that it sees ongoing demand, that should bolster the stock, and offer some much needed good news for the industry.
Write to Teresa Rivas at teresa.rivas@barrons.com
Read More: Darden’s Earnings Will Offer Another Read on Inflation’s Impact