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Darden Restaurants (NYSE: $DRI) Experiences 5%+ Decline After Mixed Third Quarter Results

Darden Restaurants, Inc. (NYSE: $DRI)

Darden Restaurants, Inc. (NYSE:$DRI) is a multi-brand restaurant operator behind popular restaurant brands like Olive Garden and LongHorn Steakhouse. 

Darden Restaurants Q3 Results 

On Thursday, March 21, 2024, Darden Restaurants reported mixed Q3 fiscal 2024 results. The company’s total sales increased by 6.8% year-over-year to $2.98 billion, below forecasts of $3.2 billion by 1.4%. Sales growth was driven by an additional 79 new company-owned Ruth’s Chris Steak House restaurants and 53 other net new restaurants across its portfolio. However, Darden’s blended same-restaurant sales experienced a 1% decrease compared to last year.

The company’s reported diluted net earnings per share from continuing operations stood at $2.60. In contrast, the adjusted diluted net earnings per share from continuing operations came in at $2.62, reflecting a 12% increase year-over-year and in line with estimates. 

Revised Guidance and Share Repurchase Program

Darden Restaurants updated its fiscal 2024 outlook, incorporating Ruth’s Chris Steak House’s operating results while excluding $55 million in pre-tax costs related to the acquisition. The company anticipates total sales of approximately $11.4 billion, below the previous forecast of $11.5 billion. It expects same-restaurant sales growth between 1.5% and 2.0% and the opening of 50 to 55 new restaurants. 

Capital spending is projected to reach $600 million, with an inflation rate of 3.0% and an effective tax rate ranging from 12.0% to 12.5%. Adjusted diluted EPS is forecasted to be between $8.80 and $8.90, compared to the previous guidance of $8.75-$8.90. Furthermore, Darden’s Board authorized a $1 billion share repurchase program, replacing the previous authorization.

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Dining Divide: Affluent Diners Fuel Growth

During the quarter, Darden witnessed a distinct divide in consumer behavior, with lower-income customers pulling back on dining out while affluent diners demonstrated an increased appetite for restaurant meals. CEO Rick Cardenas revealed that diners earning below $75,000, particularly those below $50,000, are noticeably reducing their visits across Darden’s brands, attributing this trend to an “ongoing” shift that reflects a return to pre-pandemic consumer patterns.

This disparity in consumer behavior was most evident in the company’s fine-dining segment, where lower-income consumers have significantly curtailed their dining habits. However, Darden’s resilience was bolstered by the spending power of affluent customers, who increased their frequency of visits and spent more per visit at certain brands like LongHorn Steakhouse.

Brand Performance and Strategy Adjustments

Despite facing headwinds in regions like Texas and California, Darden adapted its strategy, scaling back on deep discounting and heavy promotions. Instead, the company focused on marketing efforts and building brand equity, signaling a departure from pre-pandemic tactics and a commitment to long-term pricing strategies.

While same-restaurant sales experienced a slight decline across Darden’s brands, Olive Garden and LongHorn Steakhouse showcased resilience. Despite a drop in foot traffic, both brands saw an increase in average check size, indicating a balancing act between consumer spending habits and dining preferences.

At LongHorn Steakhouse, higher-earning patrons visited more frequently and spent more per visit, underscoring the brand’s appeal to affluent diners. On the other hand, Olive Garden experienced a 1.8% decline in same-restaurant sales, reflecting the broader trend of lower-income consumers tightening their discretionary spending.

Darden’s performance in the third quarter of fiscal 2024 highlights the company’s ability to navigate the changing dynamics of the restaurant industry. Darden has demonstrated its resilience amidst economic challenges by catering to affluent diners and adjusting its strategies to align with consumer spending patterns.

As the dining divide continues to widen, with lower-income consumers tightening their discretionary spending and affluent diners increasing their appetite for restaurant meals, Darden’s focus on brand equity and long-term pricing strategies positions the company for sustained growth.

While the road ahead may present challenges, Darden’s diversified portfolio of brands, strategic adaptations, and ongoing share buybacks and dividends provide a solid foundation for navigating the ever-evolving consumer landscape.

Darden Restaurants Stock Performance and Technical Analysis

The market reacted negatively to Darden’s third-quarter results, with the company’s stock price declining by 5.601% since the release of the results. As of Friday, March 22, the stock is trading at $164.79 per share, compared to Wednesday‘s closing price of $174.58. 

Technical analysis suggests that Darden’s stock has experienced selling pressure, with a Relative Strength Index (RSI) of 38 as of the market close on Thursday, March 21. However, the stock’s resilience in the face of broader economic challenges and the company’s strategic adjustments to cater to affluent diners may provide the potential for a recovery in the coming months.

Darden Restaurants, Inc. (DRI)
Darden Restaurants (NYSE: $DRI)

Should You Consider Investing  In DRI Stock?

While Darden’s shares have taken an over 5% hit since mixed Q3 results, the company’s focus on affluent diners and pricing power could make it an attractive buy. The dining divide favors Darden, with wealthier consumers increasing restaurant spend despite economic headwinds. Darden’s strategic shift away from deep discounts, $1 billion buyback authorization, and resilient brands like Olive Garden and LongHorn suggest potential upside. 

However, investors should monitor the impact of lower-income consumer pullback on future performance. A further stock dip could present a buying opportunity for investors who are bullish on Darden’s ability to capitalize on the premium dining segment.

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