Darden Restaurants is expected to report solid sales for stores open more than a year in their second quarter earnings release in what will be a temperature check for broader consumer spending.
Analysts surveyed by Bloomberg on average expect Darden to post $3.1 billion in revenue in the second quarter, up slightly from $2.9 billion in the same quarter last year. Same store sales are expected to increase 2.85%, up from the prior year’s 2.4%.
“They capture the consumer sentiment across demographics because they cater to such a broad consumer group,” said Jim Sanderson, an analyst at Northcoast Research. “We’re expecting decent performance, but I don’t think in this context we’re expecting anything extraordinary.”
Darden has long focused on affordability as a strategy to bring in customers, and last quarter announced that Olive Garden, its biggest brand, was testing a new menu section with existing entrees in smaller portions at lower prices. With consumers pulling back, this earnings report will indicate whether Darden’s strategy is overcoming broader economic headwinds to entice customers to spend anyway.
“Is that full service consumer continuing to perform well despite increasing pressures on the labor market and the lower-middle income consumer? I think that’s probably the question,” said Gregory Francfort, an analyst at Guggenheim.
Analysts expect Darden to report $246.5 million in net income for the quarter, up almost 3% from the previous year’s profit of $240 million. Earnings per share are estimated at $2.10 per share, up from last year’s $2.03 per share. This performance will be driven mostly by Olive Garden and Longhorn Steakhouse, Darden’s two largest brands.
“Those two combined generate most of the operating profit for the corporation,” said Sanderson. “They’ve done quite well so far this year.”
After the last earnings report, Darden’s stock fell about 9% to $184.73 per share. The stock closed slightly lower, at $176.26 on Thursday. While it’s hard to know how investors will react to the next earnings report, some are weighing whether the stock’s lower valuation makes it a more attractive option than the broader market. Darden’s stock is up 6.7% this year, compared 13.1% for the S&P 500.
“There’s a pocket of the investment community that looks at Darden versus the S&P and compares the earnings growth,” which is similar, said Francfort. But since Darden trades at a 18.39 price to earnings ratio, compared to the S&P 500 at 31.6, Darden stock may be a more enticing option.
“‘Why do I not just own Darden who’s operating well?’ I think that’s the big debate on the stock,” Frankfort added.
Investors may well get their answer later this month in Darden’s report.