I find it comical how unreliable (perhaps even counterfactual) headlines often can be as a predicter of stock performance, particularly in the near-term. Take Darden Restaurants (DRI)—a name I have owned in the past, but not a stock I presently own or recommend to readers of The Prudent Speculator—for an example of how headline-driven reactions can invoke a double-take from even the most informed market participants.
On the day of its fiscal Q1 2025 earnings report, the company initially disappointed Wall Street with weaker-than-expected earnings and revenue. Major media outlets were quick to jump on the apparent negativity to publish articles highlighting the miss, such as Darden Restaurants earnings disappoint as Olive Garden, fine dining sales struggle. The title alone painted a grim picture, focusing on short-term headwinds that dominated the report.
Darden’s reported earnings per share (EPS) came in at $1.74, below the $1.83 expected by analysts, while revenue missed estimates at $2.76 billion versus the anticipated $2.8 billion. Olive Garden, Darden’s flagship brand, saw same-store sales decline by 2.9%, and the fine dining segment, including The Capital Grille, posted a 6% drop in same-store sales. At first glance, such numbers might have raised red flags for investors, particularly given the fact that traffic in July, a critical month for dining, had sharply fallen.
Pre-market trading saw DRI shares down in response to these negative headlines. However, what those alarms failed to grasp was the broader story, and more importantly, the forward-looking potential of Darden’s overall business model. By midday, DRI had staged a significant turnaround, with shares climbing as much as 10% on the back of what some might have considered a “disappointing” earnings report.
Upon Further Review
The initial focus on Darden’s miss overlooked key elements that signaled a more nuanced outlook, not to mention that lagging year-to-date performance for the stock discounted some level of bad news.
CEO Rick Cardenas expressed confidence in the company’s long-term growth trajectory, stressing that Darden’s diversified brand portfolio and disciplined cost controls remained intact. The company also reiterated its full-year forecast, with EPS expected to land between $9.40 and $9.60, accompanied by net sales guidance of $11.8 billion to $11.9 billion—an encouraging sign that management has faith in the resilience of its operations.
Furthermore, Darden’s strategic acquisition of Tex-Mex chain Chuy’s during the quarter added to its growth potential. Non-recurring costs related to the Chuy’s purchase accounted for a penny of the quarterly shortfall.
Additionally, a closer look reveals that Darden’s LongHorn Steakhouse reported same-store sales growth of 3.7%, a bright spot amidst the noise surrounding Olive Garden’s short-term struggles. Investors looking beyond the headlines likely saw these positive signals and likely understood that the company’s fundamentals were much stronger than the surface-level numbers suggested.
In the world of investing, headlines are often crafted to generate clicks, not to provide a holistic view of a company’s performance. Darden Restaurants’ stock performance on the day of its earnings release is a prime example of how news headlines can fail as a forecaster of stock prices. This underscores why patient, value-oriented investors, like those we hope to attract at The Prudent Speculator, should focus on the bigger picture and avoid being swayed by short-term market noise.
And for those who wonder if I am a buyer or seller of DRI, the answer is neither. The stock is not inexpensive enough by my way of thinking to warrant buying nor is it too richly priced to argue for a sale.