Darden Restaurants' Second-Quarter Results Likely Pressured by Macro Conditions, UBS Says

Darden Restaurants, Inc. (DRI), the parent company of popular restaurant chains like Olive Garden and LongHorn Steakhouse, reported its second-quarter fiscal 2024 results on December 15, 2023. While the company's total sales increased by 9.7% year-over-year, driven by a 2.8% blended same-restaurant sales increase and new restaurant openings, adjusted EPS from continuing operations grew at a slower pace. UBS analysts suggest that macroeconomic conditions may have pressured Darden's earnings in the quarter.

Inflation and consumer spending trends likely played a role in Darden's results. The company projected total inflation of 3.0% to 3.5% for the full year, which impacts its cost structure and pricing strategy. Meanwhile, consumer spending, particularly among lower-income households, has been resilient but selective, with higher-income households dining out more frequently. This shift in consumer behavior may have affected Darden's sales and earnings in the second quarter.

Geopolitical factors have also significantly impacted Darden Restaurants' international operations and supply chain. Trade tensions, particularly those between the U.S. and China, have disrupted global supply chains, leading to increased costs and potential shortages of ingredients. Political instability in various regions has also posed challenges, affecting the company's ability to source products and maintain consistent operations. For instance, Darden's acquisition of Ruth's Chris Steak House, which has a significant international presence, may face additional hurdles due to geopolitical uncertainties.

Darden's CEO, Rick Cardenas, noted that while households with incomes above $200,000 dined out more than last year, they were still below pre-Covid levels. Conversely, households making below $75,000 dined out less this year but more than before the pandemic. This shift in consumer spending habits, coupled with projected lower restaurant foot traffic for the full year, suggests that Darden's sales and profitability may have been pressured by macroeconomic conditions.



Despite these pressures, Darden maintained adjusted diluted net earnings per share from continuing operations of $8.75 to $8.90, excluding approximately $0.37, after-tax, of Ruth's Chris transaction and integration related costs. This demonstrates Darden's ability to manage costs and maintain profitability amidst challenging macroeconomic conditions.

In conclusion, Darden Restaurants' second-quarter results were likely influenced by macroeconomic factors such as inflation, consumer spending trends, and geopolitical uncertainties. While the company managed to maintain profitability, these pressures may continue to impact its earnings in the coming quarters. Investors should closely monitor these trends and Darden's ability to adapt to changing market conditions.