This Type Of Restaurant Is Thriving Right Now, Yet Olive Garden Struggles: Here's Why

With food inflation still surging, up 8% for the twelve months ended August, and the Russia-Ukraine war adding to global food constraints, it's easy to see why restaurant brands and operators are experiencing diminishing margins on their bottom line.

Take Darden Restaurants DRI, the largest restaurant operator in the U.S. The Orlando, Florida-based company reported Thursday its first quarter 2023 results and its fiscal 2023 financial outlook.

Stephens & Co. analyst Joshua Long initiated an Overweight rating and a price target of $140 for 2023 for the company, which owns Olive Garden, Texas LongHorn Steakhouse and The Capital Grille.

What Happened: According to the company's statements:

• First-quarter sales increased by 6.1%, or $2.4 billion, from the previous year's quarter
• Profits declined in all four of its branded segments.
• The diluted net earnings per share for the first quarter was $1.56, down 12.8%, from the first quarter in 2022.
• Darden's fine dining subsidiaries, such as The Capital Grille and Eddie V’s, saw same-restaurant sales increase by 7.6%, while profits fell by 10.4%, compared to the previous year's quarter. 
• More budget-friendly options such as Olive Garden saw same-restaurant sales increase by 2.3%.

Olive Garden and Texas LongHorn Steakhouse took the biggest profit hit, falling 14.7% and 14.4%, respectively.

Why It Matters: Inflation is evidently impacting lower-income consumers the most as family-friendly restaurants are facing the brunt of the macroeconomic headwinds.

Since the primary guest base of Olive Garden earns less than $50,000 a year, Long expects the trend to remain steady for high-income consumers.

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Fiscal Outlook: Darden Restaurants expects total sales of $10.2 to $10.6 billion, with same-store restaurant sales growth of 4% to 6%, compared to net sales of $9.6 billion in 2022.

Furthermore, the firm is expecting inflation of roughly 6% in 2023, which will negatively impact the bottom line when it comes to profits, but may be more easily passed off to high-income consumers willing to pay the bill.

Darden’s management currently has plans to open 55 to 60 new restaurants in 2023, representing 3% growth for the year, the most openings since 2018. Long, however, expects labor shortages and high building costs to make this challenging.

Still, Darden CEO Rick Cardenas remains optimistic.

"I am pleased with the performance of all our brands in what remains a challenging inflationary and uncertain macroeconomic environment," he said.

Competitor Ratings: Additionally, Ruth’s Hospitality Group RUTH operates or franchises more than 150 fine-dining restaurants under the name Ruth's Chris Steak House.

As the Stephens & Co. analyst believes the trend remains in fine dining for high-income consumers, they also initiated an Overweight rating for Ruth’s Hospitality with a price target of $22.

Photo By: Darden Restaurants Press Release