Olive Garden owner Darden Restaurants disappoints on earnings but hikes sales outlook

Darden Restaurants reported mixed fiscal Q1 results, with adjusted EPS of $1.97 missing the $2 consensus, despite revenue of $3.04 billion meeting expectations. The company saw strong same-store sales growth from Olive Garden (5.9%) and LongHorn Steakhouse (5.5%), contributing to a 4.7% overall increase, and its fine-dining segment performed better than expected with only a 0.2% decline. While Darden raised its full-year revenue growth forecast to 7.5%-8.5%, it reiterated its adjusted EPS guidance of $10.50-$10.70, which, coupled with the EPS miss, led to a 6% drop in premarket trading.

Analysis

Darden Restaurants reported a mixed fiscal first quarter, characterized by strong top-line momentum but underlying profitability concerns that prompted a negative market reaction. While revenue of $3.04 billion met consensus expectations, adjusted EPS of $1.97 fell short of the $2.00 forecast. The company's 10.4% net sales increase was significantly aided by the acquisition of Chuy's, with organic growth better represented by the solid 4.7% rise in same-store sales. This was driven by robust performance at core brands Olive Garden (+5.9%) and LongHorn Steakhouse (+5.5%), indicating resilient consumer demand in these key segments. Furthermore, the fine-dining business showed surprising resilience, with a same-store sales decline of only 0.2%, substantially better than the 0.9% decrease anticipated by Wall Street. The primary point of concern for investors, however, is the full-year guidance. Despite raising the revenue growth forecast to a range of 7.5%-8.5%, Darden merely reiterated its adjusted EPS outlook of $10.50-$10.70 per share. This disconnect implies anticipated margin compression, suggesting that rising costs are expected to offset the benefits of higher sales. The subsequent 6% premarket decline in the stock price indicates that investors are weighing this earnings pressure more heavily than the strong sales figures.

Key Decisions for Investors

• Investors should closely monitor Darden's operating margins in subsequent quarters, as the reiterated EPS guidance despite a raised revenue forecast signals anticipated cost pressures that are concerning the market.
• The negative 6% stock reaction underscores that profitability is the key focus; consider waiting for evidence that the company can translate strong same-store sales into earnings growth before increasing exposure.
• Evaluate the performance of the newly acquired Chuy's chain and the impact of the planned Bahama Breeze divestiture, as these portfolio changes represent key variables in the company's future growth and cost structure.
• Recognize the relative strength in the fine-dining segment, which performed better than feared, as a potential indicator of resilience in higher-income consumer spending, though the segment remains in slight contraction.