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Darden Q2 Earnings Preview: What to Watch

By Demitri Kalogeropoulos – Dec 13, 2021 at 2:30AM

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The restaurant chain reports earnings results on Dec. 17.

Darden Restaurants (DRI 1.37%) has some big questions to answer for investors in a few days. The restaurant chain was a popular reopening bet on Wall Street in early 2021, but that optimism has been waning lately. Shares are barely keeping track with the wider market heading into its fiscal 2022 second-quarter earnings results on Friday, Dec. 17.

That report should show whether Darden is on track to return to record customer traffic this fiscal year, with annual revenue approaching $10 billion. But the owner of Olive Garden and LongHorn Steakhouse brands has wider ambitions beyond simply handling higher diner volumes across its 1,800 locations.

Let's take a closer look.

A couple eating dinner together.

Image source: Getty Images.

Traffic volume

Darden's last quarterly announcement, back in late September, contained plenty of encouraging news about its operating rebound. Sales returned to positive territory for the period that ended in late August despite significant challenges, including labor shortages and growing COVID-19 case rates. The chain navigated these issues, achieving $2.3 billion of fiscal first-quarter revenue, up from $2.13 billion two years earlier. "Our restaurant teams continued to operate effectively in a challenging environment," CEO Gene Lee said in a press release.

Most investors who follow the stock are looking for another strong showing on Friday as sales expand to $2.2 billion in fiscal Q2. Watch the Olive Garden brand, which has been a worry as customer traffic barely rose last quarter. Darden needs that franchise to grow in the crowded dining-out industry without sacrificing much in the way of pricing.

Margin questions

The profit outlook is a major question heading into Friday's report. Darden likely faced major inflation even as competition ramped up for diners' attention.

Look for the chain to offset these pressures in part by leaning on its to-go business. These orders represented over one-quarter of sales last quarter and were a hit with customers. Management also said in a conference call that Darden's scale advantages give it room to price more aggressively than its smaller peers. We'll find out if that advantage held through Q2 by watching its adjusted profit margin, which entered the period at 21% of sales.

Looking ahead

Heading into the report, Darden is predicting that sales will land between $9.4 billion and $9.6 billion in fiscal 2022, representing growth of between 7% and 9% from the pre-pandemic period in fiscal 2020. Earnings should grow to between $7.25 per share and $7.60 per share despite soaring inflation of around 5%.

Each of these forecasts could receive a major update this week, depending on traffic trends heading into the holiday shopping season. On the bright side, pent-up dining-out demand might convince Lee and his management team to boost their sales forecast for a second straight time in fiscal 2022. Conversely, the growth and earnings picture might become cloudier as management looks at another potential wave of COVID-19 outbreaks.

In any case, look for Darden to be bullish about its long-term growth outlook as it works to cross $10 billion in annual sales in the next year or so. Strong cash flow will also support increasing dividends and stock buybacks. These gains should help steady investors' returns on the stock, despite a likely volatile period ahead for sales and earnings.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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