Darden Restaurants (DRI 0.69%) shareholders have trailed the broader market over the past year as Wall Street soured on its rebound prospects following COVID-19-related closures. The owner of popular chains including Olive Garden and LongHorn Steakhouse is also facing new challenges, including food cost inflation, rising labor expenses, and staffing shortages.
These issues might combine to make Darden's fiscal third quarter seem weak compared to its past few quarterly announcements. But the broader business trends are positive. Let's take a closer look at the announcement set for March 24.
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The sales forecast
In mid-December management issued a bullish outlook for the period after comparable-store sales jumped 34% in the second quarter. Those gains were boosted by weak results a year earlier when pandemic shutdowns were still hurting sales. But Darden has still been lifting sales at about a 10% annual rate on a two-year basis, which smooths out the impact of those temporary closures.
Most investors are expecting sales to land at around $2.1 billion this quarter, up over 30%. Reaching that number should be considered a success, especially since Darden didn't predict the sharp rise in omicron variant cases when it issued its fiscal Q3 outlook. If it misses that figure, management will likely cite the pandemic, plus the struggle to maintain fully staffed restaurants.
Leading with value
Diners expect a trip to Olive Garden to cost more than an outing to a fast-food chain. Yet they are still sensitive to price increases, especially when inflation is speeding up. One big question heading into Thursday's report is how well Darden was able to pass along its rising costs to consumers. Labor expenses, food costs, and marketing spend are all up over the last six months, and the company needs to offset those spikes through higher menu prices and cost cuts elsewhere in the business.
Follow the company's adjusted earnings margin for signs of struggles here. That metric hit 15% of sales last quarter, but management warned about weaker results ahead over the short term as the company prioritizes sales growth over earnings gains. "We continue to execute our strategy of pricing significantly below our overall inflation to strengthen our value leadership position," CFO Raj Vennam said on the second-quarter conference call.
The updated outlook
With the fiscal fourth-quarter having started already, management will have a clear reading on where sales will land for the full year. Heading into the announcement, executives had issued a wide range of potential outcomes, with sales landing somewhere between $9.55 billion and $9.7 billion. Hitting the high end of that outlook would put the chain over 10% sales gains compared to pre-pandemic levels. The lower number represents a more sluggish 9% boost over the past two years.
Executives should narrow that outlook range on Thursday, while likely reducing short-term earnings expectations due to accelerating inflation. As for new targets for 2022 and beyond, shareholders will be eager to hear from incoming CEO Ricardo Cardenas, who takes over in late May, about Darden's expansion plans going forward.
