Darden under pressure as consumers hit 'breaking point': Analyst

Shares of Darden (DRI) are falling Thursday morning as the restaurant operator trimmed its full-year forecast on total sales and same-restaurant sales growth. The stock action is attributed to the higher costs of dining out and the weak performance of Darden's Olive Garden brand.

Guggenheim Securities Senior Analyst Greg Francfort joins Yahoo Finance to discuss Darden's performance and how the company may operate moving forward.

In the coming quarter, Francfort believes Darden's circumstances may improve: "They're guiding to the fourth quarter to be down 50 basis points to up 100 basis points. One of the things we've seen to start January and February is we've seen a tougher weather environment in the country. We've also seen delayed tax refunds that we think have weighed on the consumer. We think some of that will flip here as we get into March and April. But generally, this pressure on the low-income consumer seems like it's been building for a few quarters, and it's clearly at a little more of a breaking point."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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BRAD SMITH: The high costs of dining out are weighing on restaurants and driving some consumers away. Shares of Darden falling this morning as the restaurant operator reported a revenue miss for the quarter, as fewer customers avoided its widely-known brand. Well, Olive Garden-- well, fewer customers, we should say, went to the widely-known brand.

Olive Garden, which is typically seen as a bright spot for the company. A deeper dive into the company's quarterly results. We're joined by Greg Francfort, Guggenheim Securities senior analyst. Greg, help us make sense of what Darden is seeing right now and why investors are fading it here this morning.

GREG FRANCFORT: Yeah, I think it's the outlook-- the outlook for the business and what they are seeing in the consumer is challenged, and particularly the low end. One of the things that we've seen kind of steadily from a lot of these companies the last few quarters is them talking a little bit more concerned about the low-income consumer.

Darden called it out this quarter, as under $75,000 household customers pulled back materially. Over $150,000 actually saw transactions grow. And so there's clearly a dichotomy in the consumer that Darden saw in its results in the quarter.

SEANA SMITH: And is that something that you're expecting to continue here, a trend that we will see in the current quarter as well?

GREG FRANCFORT: Yeah. Look, I think things are likely-- they guided things to get a little bit better. They put up a down 1% comp in the third quarter. They're guiding to the fourth quarter to be down 50 basis points to up 100 basis points. One of the things that we've seen to start January and February is we've seen a tougher weather environment in the country.

We've also seen delayed tax refunds that we think have weighed on the consumer. We think some of that will flip here as we get into March and April. But generally, this pressure on the low-income consumer seems like it's been building for a few quarters and is clearly at a little more of a breaking point.

BRAD SMITH: What's the management team saying? How are they responding to this, Greg?

GREG FRANCFORT: I think one of the things that's clear and one of the reasons why we've had a buy on Darden is because they are outperforming the industry. So despite the fact that same-store sales were down 1%, that was several percent better than where the industry was over the three months that they reported earnings.

And so, I think Darden's continuing to try to outpace the category, even if there's category pressure. And that's their goal. I mean, they're looking to respond with offers that are tactical to the guest, and to try to be on brand with what the consumers are looking for.

SEANA SMITH: And what do you think that pricing strategy is going to look like as we do see inflation come down just a bit? Not as big of a headwind for Darden, for other players within the space potentially here over the next several quarters. How do you expect or how are you pricing in that they are going to adjust those pricing plans?

GREG FRANCFORT: Yeah, it's been tricky because a lot of these brands put in place pricing actions over the last 12 months. And we're surprised by the level of inflation. Darden actually ratcheted down their commodity inflation this quarter for the full year from 2% to 1.5%. They're expecting it to pick up a little bit here going forward, and we're watching beef pretty closely.

You've seen beef go on a bit of a run the last month or two. But generally, 2.5% to 3% pricing is what they're looking for. And that seems pretty appropriate. They've underpriced the category here for five years and they've created a big pricing and value gap. And we expect them to continue on that strategy.

BRAD SMITH: When you think about the targets for where Olive Garden is going to continue to meet their customers, that those who are still willing to come in store and-- in the restaurant experience versus those who are just comfortable sitting at home. And I think you and I have talked about the prominence of delivery that really came forward over the pandemic.

Where is that still lingering positively for Darden and some of their segments subsidiaries versus where customers are clearly trying to come back in for that dining experience? And I'm looking specifically at this fine dining segment, which still need to run some calculations on here, admittedly.

GREG FRANCFORT: Yeah. I think what Darden has been kind of the big holdout in terms of going into third-party aggregator, DoorDash and Uber small order delivery. They've kind of bucked the trend and kind of been the other holdout besides Domino's who just kind of recapitulated in the last six months. And I would say that one of the things that we're seeing in the industry is delivery sales have generally been under a little bit of pressure.

So I don't think that explains Darden's weakening sales. And they're outperforming the category. It feels like it's more of a macro challenge, and it's a challenge for the low-income, particularly the under $75,000 households. They said they lost transactions actually in all of their brands at the under $50,000 income households. And so that's clearly the dynamic here.

SEANA SMITH: Greg Francfort, always great to talk to you. Thanks for joining us here this morning. Guggenheim Securities senior analyst. Thanks.