Darden Earnings: Same-Store Sales Continue to Outpace the Industry, but Consumer Uncertainty Looms
Narrow-moat Darden Restaurants DRI extended its full-service restaurant share gains during its fiscal 2024 first quarter ended August, outperforming the industry’s same-store sales average by over 400 basis points (Black Box Intelligence). Driven by strong same-store sales growth of 6.1% at Olive Garden and 8.1% at LongHorn Steakhouse, total sales topped $2.7 billion, matching our estimate. Against a more challenging economic backdrop, Darden’s development of more value-oriented fare continues to resonate with consumers, buoyed by its dedication to strategically pricing at a value gap to its peers (according to Darden). As for cost management, restaurant-level EBITDA margin increased 170 basis points to 19%, thanks to food and beverage pricing leverage and productivity gains, just south of our 20% forecast.
While we still believe that Darden is well poised to navigate a challenging industry backdrop, we don’t believe it is immune from our expectation for weakening traffic, normalizing seasonality trends in dining (such as a back-to-school slowdown in fall), increasing promotional behavior from competitors, and a widening restaurant-to-grocery value proposition. Additionally, although commodity costs appear to be moderating, uncertainty surrounding beef prices (22% of Darden’s commodity basket) and outsize labor costs remain constraints. As such, we don’t anticipate much change to our expectation for $11.4 billion in sales and $8.36 in adjusted EPS for fiscal 2024, shy of management’s reiterated targets of $11.5 billion-$11.6 billion and $8.55-$8.85, respectively. We also don’t anticipate a material change to our $147 fair value estimate, leaving the shares fairly valued.
Over the long term, we continue to expect Darden to deliver 2% consolidated same-store sales growth and average 19.5% restaurant-level EBITDA margin, ahead of its 18.5% three-year prepandemic average.
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