Tell-Stock Darden Misses Estimates: Another Sign of Inflation?

I sarted writing about the tough times ahead for Restaurants back in September [Tough Times Ahead: Restaurants?]

Middle class consumer squeezed along with skyrocketing inputs for their food doesn't bode well for profit margins in this group as a whole. We have the cheese inflation, the dairy inflation, the corn inflation and now the wheat inflation.

While everyone focused on the home builders, and they had just begun to get negative on the retailers, I was mentioning how restaurant stocks outside of magical Chipotle [Chipotle - the One Impervious Restaurant Stock] were the next shoe to drop. I sounded like a raving doomsday lunatic then, but slowly all these items are coming to fruition, one by one. Unfortunately, I cannot short individual stocks in this simulation and there is no ETF that shorts restaurants so all I can do is talk about it, and not act on it. But we have slowly but surely seen the shoes fall.

1. [Oct 11th] Let's Check in on Ruby Tuesday's
2. [Oct 31st] Food Inflation Starts to Hit Restaurants

I have a few other entries but to be blunt I don't follow this sector closely because we have a very saturated retail and restaurant situation in this country, so it's not exactly a growth story. But this week, we had one of the really big names in the sector, Darden Restaurants (DRI), miss estimates by a country mile, and the type of restaurants this company runs (Olive Garden, Red Lobster) smacks right dab in the sweet spot of middle America.

Also this company is generally run very well so we can't blame bad management for the results. Fifty cents was the expectation - they came in at 30 cents. And lowered guidance. The talking heads blame the miss on acquisition costs but when you spend more than 30 seconds looking at their report you see the truth. The truth that Ben Bernanke and team have failed to acknowledge the past few years - raging inflation.

• Darden Restaurants Inc., which operates the Olive Garden and Red Lobster restaurant chains, said Tuesday its fiscal second-quarter profit dropped 30 percent due to charges and higher costs for food, beverages and labor.
• For the quarter ended Nov. 25, net income fell to $43.5 million, or 30 cents per share, from $61.7 million, or 41 cents per share, in the prior-year quarter.
• The company said Olive Garden U.S. same-store sales, or sales at locations open at least a year, grew 3.2 percent in the quarter. Red Lobster's same-store sales grew 0.1 percent.
• Costs of sales jumped 20 percent in the quarter, led by a 22 percent hike in food and beverage expenses. Labor costs rose 16 percent.

A few items to note. The Fed can ignore the food and energy costs (they say it is not part of core, therefore not important to Americans apparently), but now we see labor costs rising 16%? Well I know they care about that. Although in their government reports it probably says labor costs are going up only 3%. This is why you have to ignore all the BS coming out of government reports and listen to the companies themselves.

Second, as this story evolves and the pressure on the middle class only grows [Do the Bottom 80% of Americans Stand a Chance?] the next step will be demand destruction. That is a very fancy word for saying, people will slowly cut back on buying a product/service as they get priced out of the market. Now I am not saying people cannot afford to eat at Olive Garden. What I am saying is people who used to eat out 4x a week might go down to 2x, due to affordability. Not just affordability at this restaurant but in their lives. When gas prices are up $30 more a week from 2 years ago, along with home heating, along with buying groceries, something needs to be cut back. So you will see demand destruction. Especially as the restaurants need to hike prices to maintain their margins.

Inflation... it's out there. It's nasty. But the government doesn't want us to believe it exists. Ignore their BS reports as CNBC splices and dices the numbers as if written by god's hand. Period. Again, the 'real economy' and the 'stock market' are 2 separate things... just because the economy is slowly doing a small supernova, doesn't mean stocks need to go down. Not with the all the world's most powerful men working together to make sure stocks don't go down - I mean that would be free markets and all....

Comments

[thinkloud:]

i had actually expected this drastic drop much earlier in theyear and,in fact,sold off a majority of my own shares in anticipation. for a period of time as i watched the price rise, i thought i had made a mistake in judgement. Had i waited another three months or so it seems i could have seen an extra three dollars per share.
Today, tho, as i look at it floating around 27.00 I am happy with my decision...mainly because i think it will be a while before we see it return to the 40's.
The food prices at the grocery store is what finally made a believer of me. Prior to the personal realization of my shrinking cart not matching the bottom line of the reciept i gawked at on the way to the car....I felt all the doomsday talk was...well, just that.
I'm old enough to recall some realitively recent hard times...and i too smell somthing similar in the air. God help us...I'm not too certain that our gov't is up to the task.

2007 Dec 29 03:31 PM