Darden Restaurants (DRI) – owner of The Olive Tree – reported earnings Thursday before the market open. Blended comps of +11.7% were quite strong – especially on top of a strong quarter a year ago. But despite more than $300 million in revenue compared to the year ago quarter, operating income increased only $15 million as margins were squeezed by inflation. DRI forecast total inflation of 6% for its current fiscal year. From a stock perspective, DRI is probably fairly valued at this point. They guided current fiscal year EPS to $7.40 to $8.00. At a current $115, that’s 15x forward earnings. Comps this fiscal year are expected to be a solid +4% to +6%.
The macro implication of the report is that inflation is the driving economic force. That’s why investors are rightly hanging on every move and word from Fed Chair Jerome Powell. The question you have to ask yourself is: Is Powell Volcker 2.0? If so, risk assets are likely to be crushed along with inflation. If not, inflation is likely to be with us for a while – as in the 1970s – but risk assets may find a bottom when they sniff out a Fed pivot. The Fed is going to face its first tough test at its next meeting in five weeks on Wednesday July 27. A 75 point hike will show they are serious about crushing inflation but will likely lead to another leg lower for stocks. A 50 point hike will show that they’re starting to waiver. Pay close attention.