Overall, it’s been a good quarter for Darden Restaurants: The company posted modest earnings of 3 cents and revenue slightly above estimates. But let’s dig deeper to reveal some of the concerns. The restaurant operator, whose brands include Olive Garden and The Capital Grille, just ended its fiscal year and reported fourth-quarter results. Same-store sales for the quarter beat estimates (up 11.7% versus 9.2%, StreetAccount estimates). Those strong margins actually helped boost profits – because margins were lower than estimated due to inflationary pressures. Restaurant margins came in at 20.1% versus estimates of 21.8%, and that also brought operating margins below consensus (13.0% vs. estimate of 13.6. %). Look for margin pressure as Darden’s new financial year begins. While the sales midpoints and calculation guidance are above consensus for the year, the earnings per share guidance of $7.40 to $8 is certainly below consensus 8, 11 dollars. So why the issue of escrow? Inflation looks set to stay high in the current quarter before adjusting. On a call with analysts, chief financial officer Raj Vennam said, “We expect commodity inflation to pick up in the first quarter from the 12% we had in Q4 and beyond. will drop significantly, ending the year almost flat.” The company has raised menu prices to help offset inflation, but it will only push the limit so far. For this reason, the price increases do not include all of the inflation that Darden is facing. Vennam explained the call in detail. “We’re choosing not to pass on all of our inflation to our guests. And for some reason, are we? We don’t think all of this cost is permanent – for example, chicken, dairy and wheat, which are a significant part of our cart, especially at Olive Garden, are very high – at a very high level right now,” he said. “We don’t believe that’s very sticky in the long run.” Darden hopes that by controlling prices, it will have a competitive advantage if a recession hits and guests are scrutinizing their spending more closely. Customer segmentation Investors also have some insight into Darden’s client status. It is worth noting that there is a slight distinction that occurs with consumers. In the fourth quarter, same-store sales at the more modestly priced Olive Garden rose 6.5% – lower than estimates. Higher priced LongHorn Steakhouse products rose 10.6% – nearly double estimates. The company’s fine dining segment (think Eddie V’s and The Capital Grille) grew 34.5% from an estimated gain of 21.3%. Upscale customers do not hesitate to spend money. During the call, Darden CEO Rick Cardenas said, “Our data indicates that higher-end consumers have not experienced the same impact as lower-end consumers.” He noted that lower-end consumers, particularly at Cheddar’s Scratch Kitchen, which are more value-oriented, have “shown signs of check management… So the impact of inflation on the distribution lower part [consumer] showing off a little.” That echoes the sentiment Kroger CEO Rodney McMullen described last week. He discussed how grocers are seeing two emerging types of customers. up.” Many customers continue to shop for premium products throughout the store, including Private Selection, Murray’s Cheese and luxury meal solutions,” he said. For other customers who [budgets] More directly affected by food and fuel inflation, they are actively looking for ways to save. “Ultimately, a diversified brand portfolio could help Darden withstand an economic downturn – especially if premium customers continue to spend. According to analysts” Darden’s Cardenas said, “We will pricing higher-end brands or more affluent consumers might absorb some of those prices and be a bit less elastic than lower-end brands.”