Darden's Guidance Shows Fine Dinning Has Lost To Fast Food Indulgences

On Thursday, the owner of the Olive Garden chain reported its fiscal fourth quarter earnings that topped Wall Street estimates. However,  the annual profit that Darden Restaurants Inc DRI forecasted was largely below what Wall Street had expected with a clear warning of a slowdown in fine dining that is getting beaten by fast food chains like McDonalds Corporation MCD and Chipotle Mexican Grill CMG. Before its earnings report, the stock had been approaching its all-time high of $168.98 that was set on June 15th, but ended up falling more than 3% in morning trading.

Fiscal Fourth Quarter Results Topped Estimates

During the quarter that ended on May 28th, revenue rose 6.4% as it amounted to $2.77 billion with LongHorn Steakhouse's same-store sales growing 7.1% while Olive Garden followed with 4.4%. While Olive Garden, who makes up about 45% of sales fell short of Street Account's 5% estimate, LongHorn Steakhouse exceeded expectations big time as StreetAccount expected 4.9%. The underperformer was the fine dining segment whose same-store sales dropped 1.9%.

Results did not include Darden's $715 million purchase of Ruth’s Chris Steak House that was completed on June 14th. Labor inflation amounted to about 6% and dented margins, but also helped boost employee retention and improve service. Net income amounted to $315.1 million, or $2.58 per share, rising from last year's comparable quarter when it amounted to  $281.7 million, or $2.24 per share.

2024 Fiscal Guidance Is What Disappointed Investors

Orlando, Florida-based restaurant chain guided for full-year profit in the range between $8.55 per share and $8.85 per share with same-store sales growing from 2.5% to 3.5%. CFO Raj Vennam announced that menu prices will rise by 3.5% to 4% due to rising costs, particularly for labor, and therefore traffic for the year will likely be flat to 1.5% lower. 

Darden guided for net sales between $11.5 billion and $11.6 billion, with same-store sales growth between 2.5% and 3.5%. Along with capital spending of $550 million to $600 million and total inflation of 3% to 4%, adjusted earnings per share from continuing operations are expected between $8.55 and $8.85.

Softer fine-dining sales are expected through the undergoing, fiscal first quarter but according to the CFO Raj Vennam, traffic will stabilize on a YoY basis afterwards.

Comparison Has Been Made Difficult

As for the fine dining chains, it is important to note that during last year's comparable quarter, customers were going out to celebrate the departure of Omicron. Moreover, traffic at Darden's fine dining restaurants has more than doubled over the last three quarters when compared to 2019 levels. However, the chain observed the weakened demand for alcoholic beverages, while fine dining fell only for lower-income and younger age groups, while they flattened for higher income and older age groups. In both cases, the trends suggest a degree of price sensitivity, as CEO Ricardo Cardena concluded. 

Fast Food Over Fine Dining

Even Darden's rival Texas Roadhouse TXRH is losing market share to fast-food chains such as McDonalds and Chipotle who are dominating the field. But Cardenas remains hopeful, as despite consumers prioritizing affordability in times of economic tension, they also go for the value and the experience. Yet, the latest reports do show that fast food chains like McDonalds and Chipotle,who are showing remarkable revenue and profit trends, are gobbling up restaurants who offer a full-service dining experience. From an investor perspective, there's a lot to like from McDonalds as it began 2023 by posting strong sales on top of last year's gains. Moreover, McDonalds is accelerating its gains and was even ahead of Chipotle in late April, comparable-store sales at McDonalds rose 13% in the quarter, while Chipotle experienced an 11% comps increase during its first quarter. McDonalds achieved a double win as it increased customer traffic while also raising prices. McDonalds is also a leader in the operating margin arena with its margin rising above 45% of sales, improving further from 2022's 40.4%. Although McDonalds gets to profit from its franchises through fees and royalty charges, its business momentum is all about the menu items and that 'something' customers like about its restaurants. Therefore, the concept of 'value and experience' is a topic to be explored in detail from the aspect of consumer behavior during challenging times as fast food chains seem to have that 'something' that consumers especially treasure when times are hard as otherwise, higher menu items would put them off.

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