Darden Restaurants (NYSE:DRI) stock has been caught up in the wider stock market slump as investors fear plunging customer traffic during any prolonged coronavirus outbreak. The good news is that the restaurant chain, which owns the Olive Garden and LongHorn Steakhouse brands, among others, will announce its earnings results in just a few days.
That report should include management's latest reading on the health of the business today, along with any potential impacts they're already seeing from the health scare.
Let's take a closer look at the announcement due out on Thursday, March 19.
Darden's previous earnings report raised some key growth questions that investors might get clarity about this week. Sure, the chain's overall sales gains outpaced a sluggish industry in the fiscal second quarter. Comparable-store sales landed at 2%, after all, to mark an acceleration over the prior quarter.
But not all of its franchises contributed to those gains. The Olive Garden brand held steady and smaller Darden concepts like Cheddar's Scratch Kitchen declined. LongHorn Steakhouse was the standout, with nearly 7% higher comps in the period.
This week we'll learn whether operating trends kept the company on pace to meet management's goal of 1% to 2% comps this fiscal year. The key figure to watch here is customer traffic, which was down 1% at Olive Garden last quarter and rose 3% at LongHorn. Darden would love to see positive results in both brands, as that would give management more flexibility to increase prices or boost average spending.
Costs are rising
Darden's costs have been trending higher in recent quarters, just as they have for most restaurant stocks. Food inflation is playing a role, but the bigger factor is increasing labor expenses. That line item will get plenty of attention this week, too, given that the chain just announced plans to offer new sick leave benefits to all of its hourly employees. Look for CEO Gene Lee and his team to detail the impact of that change on its earnings outlook.
The company said in December that restaurant operating costs should grow by about 2.5% for the year. So far menu price increases are modestly trailing that result, having risen by 2% over the past six months. Darden is more than offsetting that gap with a tilt in sales volumes toward higher-priced meals, though. Continued success there should allow operating earnings growth to keep outpacing sales gains.
So far, most major restaurant chains have reported no impact from changes in consumer behavior tied to the coronavirus outbreak. Darden's third-quarter numbers should also be insulated, since they'll only cover sales trends through late February.
Still, management might have enough data from early March, when outbreak fears started impacting the stock market, to hint at the scale of any potential demand slowdown. The fluid situation means investors won't get a clear picture about the chain's sales trends over the next few weeks. But they'll hear management's latest reading on how the outbreak is changing metrics like customer traffic.