On its face, it was a effective quarter for Darden Eating places : The corporate posted a modest 3-cent earnings beat and revenues have been a bit above estimates. However let’s dive deeper to disclose some issues. The restaurant operator, whose manufacturers embody Olive Backyard and The Capital Grille, simply accomplished its fiscal 12 months and reported its fourth-quarter outcomes. Similar-store gross sales within the quarter have been solidly above estimates (up 11.7% versus up 9.2%, in accordance with StreetAccount’s estimates). These robust comps actually helped propel the bottom-line beat – as a result of margins have been under estimates resulting from inflation pressures. Restaurant margin got here in at 20.1% versus estimates of 21.8%, and that additionally put working margin under consensus (13.0% versus estimates of 13.6%). Search for margin strain as Darden’s new fiscal 12 months begins. Whereas the midpoints of gross sales and comps steering are above consensus for the 12 months, per-share earnings steering of $7.40 to $Eight is solidly under $8.11 consensus. So why the margin drawback? Inflation appears to be like to be coming to a head within the present quarter earlier than moderating. On a name with analysts, chief monetary officer Raj Vennam mentioned, “We anticipate the commodities inflation charges to extend within the first quarter from the 12% we had in This fall after which to reasonable considerably, ending the 12 months roughly flat.” The corporate has been elevating menu costs to assist offset inflation, nevertheless it’ll solely push the restrict thus far. Because of this, value hikes aren’t protecting all of the inflation Darden is going through. Vennam elaborated on the decision. “We’re selecting to not cross alongside all of our inflation to our visitors. And for a few causes, proper? We do not assume all of this price is everlasting — for instance, hen, dairy and wheat, that are a good portion of our basket, particularly at Olive Backyard, are extremely — at a really excessive degree proper now,” he mentioned. “We do not imagine that is very sticky over the long run.” Darden hopes that by conserving costs in test, it will be at a aggressive benefit if a recession comes alongside, and visitors are extra intently scrutinizing their spending. Buyer bifurcation Traders additionally received some insights on the state of Darden’s visitors. What’s noticeable is that there’s a little bit of a bifurcation taking place with the patron. Within the fourth quarter, same-store gross sales on the extra modestly priced Olive Backyard have been up 6.5% — under estimates. Greater-priced LongHorn Steakhouse comps have been up 10.6% — practically double estimates. The corporate’s effective eating section (assume Eddie V’s and The Capital Grille) noticed comps soar 34.5% versus an estimated improve of 21.3%. The high-end buyer will not be hesitating to spend cash. On the decision, Darden CEO Rick Cardenas mentioned, “Our information signifies that higher-end client hasn’t seen the identical impression as customers on the decrease finish of the spectrum.” He famous that lower-end customers, particularly on the extra value-oriented Cheddar’s Scratch Kitchen, have “proven indicators of test administration… So the impression that inflation is having on that-lower finish [consumer] is exhibiting somewhat bit.” That echoes the sentiment Kroger’s CEO Rodney McMullen described final week. He mentioned how the grocery store has seen two forms of prospects rising. “Many purchasers proceed to buy premium merchandise all through the shop, together with Non-public Choice, Murray’s Cheese, and deluxe meal options,” he mentioned. “For different prospects, whose [budgets] are extra straight impacted by meals and gasoline inflation, they’re actively in search of methods to avoid wasting.” Finally, the varied portfolio of manufacturers may assist Darden endure an financial slowdown – significantly if the higher-end buyer continues to spend. On the analysts’ name, Darden’s Cardenas mentioned, “We’d value our higher-end manufacturers or extra prosperous client that may take up a few of that pricing and is rather less elastic than we’d on the lower-end manufacturers.”