This Type Of Restaurant Is Thriving Right Now, Yet Olive Garden Struggles: Here’s Why – Ruth’s Hospitality Group (NASDAQ:RUTH), Darden Restaurants (NYSE:DRI)

With food inflation still rising, up 8% in the 12 months to August, and the Russia-Ukraine war contributing to global food restrictions, it’s easy to see why restaurant brands and operators are seeing the bottom line plummeting record margins.

Take Darden restaurants DRIthe largest restaurant operator in the United States. The Orlando, Fla.-based company announced its first quarter 2023 results and fiscal 2023 financial outlook on Thursday.

Stephens & Co. analyst Joshua Long initiated an Overweight rating and $140 price target for 2023 on the company, which owns Olive Garden, Texas LongHorn Steakhouse and The Capital Grille.

What happened: According to the company:

  • Revenue for the first quarter increased 6.1%, or $2.4 billion, from the year-ago quarter
  • Earnings declined in all four branded segments.
  • Diluted net earnings per share for the first quarter was $1.56, down 12.8% from the first quarter of 2022.
  • Darden is fine Restaurant affiliates like The Capital Grille and Eddie V’s saw same-restaurant sales increase 7.6% compared to the year-ago quarter, while profits fell 10.4%.
  • Budget-friendly options like Olive Garden saw a 2.3% increase in same-restaurant sales.

Olive Garden and Texas LongHorn Steakhouse posted the largest profit losses, down 14.7% and 14.4%, respectively.

Why it matters: As inflation appears to hit low-income consumers the hardest, as family-friendly restaurants take the brunt of macro headwinds.

With Olive Garden’s main guest base earning less than $50,000 per year, Long expects the trend to remain stable for high-income consumers.

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Fiscal Outlook: Darden Restaurants expects total sales of $10.2 billion to $10.6 billion, with same-store restaurant sales growing 4% to 6% compared to net sales of $9.6 billion in 2022.

Additionally, the company expects inflation to hover around 6% in 2023, which will hurt earnings when it comes to profits but will be more easily passed on to high-income consumers who are willing to foot the bill.

Darden’s management currently plans to open 55 to 60 new restaurants in 2023, representing 3% growth for the year, the most new openings since 2018. However, Long expects labor shortages and high construction costs to make this a challenge .

Still, CEO of Darden Rick Cardenas remains optimistic.

“I am pleased with the performance of all our brands in what remains a challenging inflationary and uncertain macroeconomic environment,” he said.

Competitor Ratings: Additionally, Ruth’s Hospitality Group RUTH operates or franchises more than 150 fine dining restaurants under the Ruth’s Chris Steak House name.

As the Stephens & Co. analyst believes the fine dining trend continues for high-income consumers, they have also initiated an Overweight rating on Ruth’s Hospitality with a price target of $22.

Photo by: Darden Restaurants press release

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