Darden (DRI) Down 21% YTD: More Pain or Relief Ahead?

This year has been a tough one for the restaurant industry so far, and Darden Restaurants, Inc. DRI is no exception. Year to date, the company’s shares have slumped 20.5%, compared with the industry’s decline of 19.9%.

More Pain Ahead

Although comps have increased over the past few quarters, a decline in traffic remains a major concern for companies in this space. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. The company doesn’t expect a substantial traffic increase going into the year at the mid-point.

Despite solid cost management, higher labor costs due to increased wages are expected to persistently keep profits under pressure. The company anticipates inflationary costs to persist for the remainder of the year.

In the fiscal fourth quarter, total operating costs and expenses increased 15.8% year over year to $2,264.7 million. This escalation was primarily due to a rise in food and beverage costs, restaurant expenses and labor costs. For fiscal 2023, the company expects total inflation of 6%, commodities inflation of 7% and total restaurant labor inflation of 8%, which includes hourly wage inflation.

The Zacks Rank #5 (Strong Sell) company’s earnings per share guidance for 2023 have dampened investor sentiments. For fiscal 2023, the company anticipates sales to be approximately $10.2-$10.4 billion. Same-restaurant sales in fiscal 2023 are expected in the range of 4% to 6%. However, EPS from continuing operations is anticipated to be $7.40-$8. Its mid-point of $7.7 was lower than the Zacks Consensus Estimate of $8.21. In the past seven days, the Zacks Consensus Estimate for earnings has moved down by 3.8% to $7.90.

Key Picks

Some better-ranked stocks in the Zacks Retail-Wholesale sector are MarineMax, Inc. HZO, BBQ Holdings, Inc. BBQ and Arcos Dorados Holdings Inc. ARCO.

MarineMax sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 32.8%, on average. Shares of the company have declined 20.1% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for MarineMax’s 2022 sales and EPS suggests growth of 16% and 21.5%, respectively, from the year-ago period’s levels.

BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 31.4% in the past year.

The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 34.4%. Shares of the company have appreciated 15.1% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.

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