Darden Restaurants Stock Sinks on Higher Costs

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We learned Friday morning that Darden Restaurants (NYSE:DRI) — owner and operator of Olive Garden, Red Lobster, Longhorn Steakhouse, and several other restaurants in the United States — released disappointing fourth-quarter earnings figures. The company’s quarterly sales came in relatively flat year over year at $2.32 billion versus $2.3 billion last year. However, earnings plummeted from $132 million, or $1.01 per share, to $86.5 million, or 65 cents per share, as the company saw an increase in its operating costs as well as added expenses relating to the pending sale of its Red Lobster Unit. As a result, the company’s stock fell by about 2 percent.

Investors should take note of a couple of things when determining whether to purchase Darden shares. The first is that like many companies in the restaurant sector, rising costs are hitting the company’s bottom line. Even if we strip out the loss incurred due to the pending sale of Red Lobster — about $25 million — the company’s profits declined by about 15 percent. Since its sales were relatively flat, this means that its profit margin took a big hit as a result of rising commodity costs.

Not only are the more common and heavily traded agricultural commodities rising — think wheat, live cattle, and coffee — but the prices of commodities that aren’t tracked by the futures market have been rising, as well. As a result, Darden’s input costs have risen, and the company has evidently decided that it would be too risky to raise its prices accordingly. Darden has been hit particularly hard by this trend, and investors who fear that it will continue as a result of rising inflation should avoid the shares and either look to companies that haven’t seen rising food prices hurt their businesses or avoid the sector altogether.

However, investors should note that the company does have some strong points. For instance, it is selling Red Lobster, which reported a 5.6 percent decline in sales in the fourth quarter. Thus, going forward, investors can expect that the company will be raising some cash to invest, and it will generate stronger sales growth, as it is focusing more on its higher-growth businesses.

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