The largest restaurant owner in the country Darden Restaurants (NYSE: DRI) uses its massive size to dampen price increases to create value and increase loyalty for its brands. Darden operates eight popular restaurant brands, ranging from casual dining experiences such as Olive Garden, Bahama Breeze, Cheddar’s, Season’s 52 and Longhorn Steakhouse to premium restaurants such as The Capital Grille and Eddie V’s Prime Seafood. The pandemic provoked a war of attrition with countless mom and pop establishments closing their stores, leaving only the best capitalized restaurants with the deepest pockets to take the plunge. storm during detentions. Under those circumstances, the major players gained market share at the reopening. Yet another battle of attrition is approaching. This time it is being driven by record inflation, falling consumer spending and a tight job market eventually, the already thin margins for restaurants are pinching as even more smaller players close shop. Darden proves he is the best restaurant operator in the country as they continue to grow to underpin sales and bottom line value proposition for its customers. In contrast, competitors like: Brinker International (NYSE: EAT) get their margins under pressure difficult.
Can’t pass the buck
Passing all inflation on to the customer has proven to be a failing and second-degree solution, as it deters consumers. While the premium brands can get away with it, the lower budget cost-conscious consumers are especially price sensitive at casual restaurants. Darden took advantage of precision pricing below the rate of inflation and to enable the strength of its brands to grow margins even higher than pre-COVID levels. As the largest restaurant operator, Darden has the economies of scale to ease some inflationary pressures on margins by implementing a masterful pricing strategy that is just below the inflation rate. While competitors are noticeably increasing menu prices, Darden has been slow to modestly increase prices to encourage customers to stick with them in tighter times and earn more loyalty as customers appreciate the value proposition.
Strong finishing performance for fiscal 2022
Despite record inflation, Darden was able to close fiscal year 2022 on a strong note. On June 23, 2022, Darden announced its fourth quarter 2022 results for the quarter ended May 2022. The company reported non-GAAP diluted earnings per share (EPS) of $2.24 versus $2.21 consensus estimate. analysts, with a profit of $0.03. Revenues were up 14.2% year-over-year (year-on-year) to $2.06 billion, beating analyst consensus expectations of $2.54 billion. Comparable restaurant sales increased 11.7%. Darden also issued a new $1 billion share repurchase program. Rick Cardenas, CEO of Darden: “We had a strong quarter despite high inflation, and fiscal 2022 was a solid year. Darden’s competitive advantages enabled our brands to strengthen their business models, while our restaurant teams continued to deliver exceptional guest experiences in a challenging work environment.” As our new fiscal year begins, our focus remains on driving profitable sales, investing in the guest experience and simplifying operations. Darden’s strategy and strong balance sheet position us well regardless of the business environment.”
This is what the charts say
Using the gun cards on the weekly and daily timeframes provides an accurate picture of the landscape for DRI stocks. The weekly gun chart is trending up with a rising 5-period moving average (MA) support followed by the 15-period MA support at $122.54. The 200-period weekly MA support is at $128.14 and the 50-period MA resistance is near $134.30 Fibonacci (fib) level. The weekly stochastic formed a bullish mini pup oscillation towards the 80 band. The weekly upper Bollinger Bands (BBs) are at $138.19 with rising lower BBs at $108.84. The daily rifle chart is trying to break through as the rising 5-period MA at $126.39 attempts a crossover through the 15-period MA at $126.84. The 50-period daily MA rises to $123.39 and the 200-period daily MA falls to $131.67. The daily stochastic rolls up again through the 20 band. the daily market structure layer (MSL) breakout triggered above $120.75. Attractive pullback levels are at $126.30 per day 5-period MA, $124.01, $120.99 fib, $116.64 fib, $114.39 and the $109.32 fib level.
Darden CFO Raj Vennam pointed out how their pricing strategy results in maintaining operating margins as competitors come under pressure. He noted, “During the quarter, we took additional pricing to offset some of the growing inflation, bringing the total price to 6% for the quarter and 3% for the full year. This is well below our annual inflation at just over 6% as we continue to execute on our strategy to strengthen our leading position in value.” In short, they raise prices much more slowly than competitors due to their sheer size, which should instill a sense of value and loyalty among its customers and attract new customers, while competitors helplessly raise prices to ease margin pressure.
Looking ahead to fiscal 2023
The company prevailed in expectations in light of the macroeconomic environment. Darden issued fiscal 2023 guidance for earnings per share between $7.40 and $8.00 versus $8.13 consensus analysts. Fiscal 2023 revenues for the full year are expected to be between $10.2 billion and $10.4 billion, versus $10.24 billion. Same store sales are expected to grow between 4% and 6%. Growth is still expected, while competitors expect margins to keep falling. The shares trade at 16.5X future earnings and have a dividend yield of 3.78%.
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