Darden Restaurants will report its fiscal fourth-quarter earnings before the bell on Thursday, giving investors more insight into how its full-service restaurants are bouncing back from the pandemic. Like most casual and fine dining restaurants, the Olive Garden parent saw its sales plunge over the past year as diners stayed home. Surging takeout sales from LongHorn Steakhouse and Olive Garden were a rare bright spot, giving investors hope about Darden's future. On March 13, 2020 – when then-President Donald Trump declared Covid-19 a national emergency – Darden Restaurants' stock closed at $65.32. Since then, shares of the dining giant have more than doubled, trading at about $135 apiece on Wednesday. Darden is trading at roughly 33 times its forward earnings, making it expensive relative to the stocks of its rivals. Cheesecake Factory , for example, is trading at 25 times forward earnings, while Ruth's Hospitality Group is trading at 22 times. Indeed, when Darden last reported earnings in March, it topped Wall Street analysts' estimates by 42%. Analysts surveyed by Refinitiv have revised their fiscal fourth-quarter earnings estimates by an average of 13% since Darden's last report. Nearly half of those changes have happened in the past month. Wall Street is now expecting earnings of $1.78 per share on revenue of $2.19 billion, according to Refinitiv. The company told investors in March it was predicting fiscal fourth-quarter total sales of $2.1 billion and earnings per share from continuing operations of $1.60 to $1.70. It's unclear if the company will give investors a full-year forecast for fiscal 2022 or just the next fiscal quarter. As Darden rolls out its results, investors should pay close attention to these three key areas: 1. Consumer demand: Dining in or carrying out Consumers are shifting their spending toward dining and travel as the economy reopens. That's been a boon to the restaurant industry. BlackBox Intelligence reported the industry's same-store sales rose 33% during the week ended June 6 compared with a year ago, when same-store sales plunged more than 20%. In the last two months, consumers have returned to spending more money dining out rather than eating in, according to data from the U.S. Census Bureau. Even as the broader industry recovers, full-service restaurants are lagging behind those in the fast-food sector. That's a disadvantage for Darden, which only owns casual and fine dining restaurants. In particular, the company's fine-dining chains like The Capital Grille have been particularly challenged throughout the pandemic because of their reliance on business customers. Many employees in the U.S. are still working remotely , and business travel remains depressed . Many urban areas are also facing slower recoveries. Black Box Intelligence data shows shrinking same-store sales for full-service restaurants in cities like Washington and San Francisco for the week ended June 6. Darden CEO Gene Lee said last year that the company was losing millions of dollars in sales at its New York City restaurants, including a 94% decline in sales at the Times Square location of Olive Garden . 2. Attracting employees back to the workplace JPMorgan analyst John Ivankoe named labor availability as the No. 1 risk for further sales recovery across the restaurant industry in a note to clients on Monday. Across the industry, restaurant operators are opening locations later or closing earlier, citing problems finding enough willing workers . Darden executives said last quarter they are tackling the issue by spending about $17 million to give hourly restaurant workers a one-time bonus and to hike wages. Now every hourly worker at its restaurants earns at least $10 an hour, including tip income. In January 2022, Darden will raise hourly wages to $11. The following January they'll go up to $12 an hour. Investors will want to know if those steps were enough to win over workers, or if Olive Garden and The Capital Grille will be running short staffed because employees chose higher paying jobs. 3. The rising cost of food Besides labor costs, another major expense for restaurants is on the rise: food. Shortages, shipping delays and the transition away from supplying grocery stores is putting pressure on the industry's supply chain and sending the cost of ingredients up for eateries. Wedbush analyst Nick Setyan wrote in a note to clients last Wednesday that he wasn't worried about Darden's food costs because of existing contracts with suppliers. Moreover, the company's size gives it an advantage in negotiation, and its basket of ingredients across its chains has more variety than a fried chicken or burger chain. However, investors will want to watch for the company's expectations about the duration and magnitude of rising commodity prices. If the inflation outlasts the near term, the company could find itself passing along costs to the customer or facing pressure on its margins.
