Darden Restaurants delivered a fiscal first quarter that was close to plan but short of what investors wanted. Earnings of $2.05 per share came in a penny below the $2.06 consensus and further below the $2.09 Earnings Whisper number, a 1.9% miss. Revenue of $3.20 billion matched consensus and rose 5.1% year over year. Earnings grew 4.1%, a sharp slowdown from the 22.8% pace of the prior quarter, although management had guided in June to low-to-mid single-digit growth for Q1. The company reaffirmed its fiscal 2027 outlook of $11.10 to $11.35 per share. The central tension is that Darden's flagship brand is losing momentum while its second-largest brand keeps outperforming. The reaffirmed guidance now depends on a back-half recovery that the quarter itself did not demonstrate.
The quality of the earnings growth deserves scrutiny. Reported EPS fell from last year's $2.19 GAAP figure, but that comparison included a $0.26 gain on the Olive Garden Canada sale. The 4.1% growth is measured against adjusted EPS of $1.97. Even on that basis, net earnings rose only about 1% ($234.3 million versus $231.4 million adjusted). The diluted share count fell to 114.4 million from 117.6 million, so repurchases did much of the per-share work. Several other items weighed on the quarter:
- The effective tax rate was higher than last year's adjusted rate.
- Interest expense climbed to $50.3 million.
- Operating cash flow fell to $279 million from $342.5 million.
- Short-term debt rose by roughly $286 million, while Darden spent $221 million on buybacks and $184 million on dividends.
The balance sheet can handle this, but capital returns are running ahead of internally generated cash this quarter.
Beneath the headline, the portfolio is diverging. On a comparable-calendar basis, Olive Garden comps rose just 1.0%, down from 2.4% in Q4, 3.2% in Q3 and 4.7% in Q2. Its segment margin slipped 20 basis points to 20.4%. Management attributed 150-200 basis points of Olive Garden traffic pressure to lettuce safety concerns and the World Cup, along with lapping last year's Uber free-delivery promotion. The call also disclosed that weekday lunch at Olive Garden has deteriorated by hundreds of basis points since COVID. That lunch daypart is roughly 20% of traffic and its weakest, and the problem is structural rather than weather- or event-driven.
LongHorn is the offset. Comps rose 6.8% for its 22nd straight positive quarter, and segment margin expanded 60 basis points to 18.0%. Segment profit rose to $154.6 million from $134.9 million, larger than Olive Garden's dollar gain by a wide margin. Yard House comped about 10%, helped by the World Cup, and crossed $1 billion in trailing sales. Consolidated restaurant-level EBITDA margin was flat at 18.8%. Fine Dining and Other margins declined, the latter reflecting the Bahama Breeze wind-down.
The call preserved a credible path to the reaffirmed guidance, and the forward evidence leans positive. Management said traffic improved sequentially through the quarter, with August the strongest month and September stronger still. The relaunched Never Ending Pasta Bowl, now at a higher price point, started better than expected, and all 10,000 Pasta Passes sold out immediately. Olive Garden will market an unlimited soup, salad and breadsticks lunch offer in Q2 while testing a new lunch platform. Costs are also cooperating:
- Q1 commodity inflation was 3.5%, below the roughly 4% guided in June.
- Full-year inflation is still expected near 3%.
- Retail beef demand destruction eased to about -4% from -8.5% in June.
Bears still have legitimate ammunition. Pricing of 3.7% moderates to the low-2% range by Q4, which narrows the cushion if traffic falters. The Thanksgiving calendar shift creates roughly a 1% headwind to Q2 sales. Sustained diesel above $6 could cost 10-15 basis points of sales, and business dining spend in fine dining is still declining.
The market setup was lukewarm going in. Investor sentiment was negative ahead of the report and weakened modestly, moving from -0.06 to -0.11. Shares were only 1.7% above the opening price after the June report. The stock rallied to a 52-week high of $229.76 in mid-August, then gave back part of that move and entered earnings about 7% below the peak. It still sat 5.1% above its 200-day moving average and nearly 12% above the quarter's July low. The Earnings Whispers trend signals are mostly positive, with price, momentum and AVWAP readings constructive. That suggests the stock had held up reasonably well despite cooling sentiment, which leaves a slight miss and an unchanged outlook with little to add.
The bottom line is that Darden's quarter was an in-line hold rather than a break in the story. LongHorn's strength, improving exit-rate traffic, benign commodity trends and aggressive buybacks kept the full-year plan intact. Still, Olive Garden's steady comp deceleration, thin underlying net earnings growth and debt-funded capital returns make the reaffirmed outlook more dependent on the Q2 promotional push than the headline suggests. Investors will want September's traffic improvement to carry into Olive Garden's results before paying up for the recovery.