Earnings Preview: What to look for when Darden Restaurants reports Q2 results

Darden Restaurants, Inc. (NYSE: DRI), a leading full-service restaurant chain that owns popular brands like Olive Garden and LongHorn Steakhouse, is preparing to report second-quarter earnings on Friday at 7:00 a.m. ET. While the company bets on its continued digital push, enhanced menu offerings, and stable comparable sales to drive growth, there is a general slowdown in fine dining sales as customers increasingly indulge in quick-service dining.  

After recovering from a 12-month low, Darden’s stock has made steady gains since early October. The upswing should continue beyond the earnings announcement and the stock looks set to hit a new record before the fiscal year ends. The all-time high is $170.55, which was recorded around five months ago. The company has been paying dividends consistently for nearly three decades and currently offers a yield of 3.8%. In the past three years, the dividend increased by a fifth.

Q2 Report Due

Darden’s second-quarter earnings report is expected to be out on December 15, before markets open. Market watchers are bullish on the company’s performance in the November quarter and forecast revenues of $2.74 billion, which represents a 10% year-over-year increase. It is estimated that Q2 earnings grew 14% annually to $1.73 per share.

The lion’s share of revenue is generated by company-owned restaurants, and the remaining small portion comes from a network of franchised restaurants and sales of consumer-packaged goods. Going forward, contributions from the recently acquired Ruth’s Chris Steak House will strengthen the top line, once the integration is completed.

Margins will likely be negatively impacted by higher menu prices as the management looks to raise charges due to rising costs. Meanwhile, the inflation-induced pressure on family budgets is forcing customers to dump premium alcoholic beverages and opt for less expensive brands, resulting in a pullback in the company’s alcohol sales.

Outlook

Darden executives are optimistic about the company’s sales performance in the remainder of the year. They forecast full-year sales of around $11.55 billion, which is up 10% from the prior-year number. EPS from continuing operations, adjusted for one-off items, is expected to be between $8.55 and $8.85.

“Our ability to drive profitable sales growth is a testament to the strength of our business model and adherence to our strategy. We continue to strengthen and leverage our Four Competitive Advantages of Significant Scale, Extensive Data and insights, Rigorous Strategic Planning, and Results-Oriented Culture, while our restaurant teams remain intensely focused on executing our Back-to-Basics Operating Philosophy anchored in food, service, and atmosphere. This focus on being growing with the basics continues to drive strong guest satisfaction,” said CEO Ricardo Cardenas at the last earnings call.

Earnings Beat

In the August quarter, revenues of Olive Garden, and LongHorn Steakhouse rose 8% and 11% respectively, while Other Businesses grew 6%. That translated into a 12% increase in sales to $2.73 billion, which was broadly in line with the market’s projection. At $1.78, earnings per share was up 14% year-over-year and above analysts’ consensus estimates.

On Tuesday, shares of Darden Restaurants traded slightly above $160, after opening the session higher. There was a 7% gain in the past 30 days alone.