Olive Garden, fine dining results weigh on Darden Restaurants' stock

In its fourth quarter earnings results, Darden Restaurants reported a decline in sales in its fine dining segment. iCapital Chief Investment Strategist Anastasia Amoroso tells Yahoo Finance Live what the restaurant company's results are telling investors about the state of the consumer.

Video Transcript

JULIE HYMAN: Of course, a slate of earnings reports in recent weeks have shown that consumers are tightening their belts, at least, in the margin, when it comes to spending by making more selective purchases. The question now is whether that discretion it's spread to services from stuff.

This morning, we did get a clue. Darden Restaurants reported its fourth quarter earnings. And the stock has been falling in early trading as the restaurant operator saw an unexpected decline in its fine dining segment. It also reported mixed comparable sales results, including a very slight miss for Olive Garden, a beat for Longhorn Steakhouses. And the fine dining piece really interesting here. It own Seasons 52. It owns Capital Grill. It just closed on the acquisition of Ruth's Chris Steakhouse, which is not included in these results because it just closed on June 15.

But, nonetheless, is this a sign perhaps, that we are seeing now on the services side a little bit of a pullback? Anastasia Amoroso is still with us, iCapital chief strategist. Anastasia, I know you're a macro, not a micro type of person. But as we read the tea leaves from earnings, are you taking away here that indeed, we are seeing consumers start to change their spending patterns not only on the good side, but on the services side?

ANASTASIA AMOROSO: I think that's a bit of a premature conclusion, obviously, we did get the Darden report that maybe suggests there's some weakness in the fine dining segment. But when I look, Julie, to a point to the big macro picture, what I see is the consumer that has a job and is getting paid more for that job. 3.5% unemployment rate, 4.4% year-over-year wage growth. And, by the way, when you take inflation into account, that means that actually in real terms wages ever so slightly are going up.

So that's discretionary spending power that's still very much for the consumer. Then I add to that $1.5 trillion of excess savings that the consumer still have relative to pre-pandemic levels. And then I look at the household debt burdens. And household debt was 24% of net worth. And today, it's about 12%. 24% was at the peak of the financial crisis.

So the point is the balance sheets, the cash flows of the consumers are really, really in good shape. And that's why I don't see a big change of trend there. Now, speaking of trends, Julie, when we look at the retail sales reports, when we look at the real time, real life credit card spending data, we see a very clear trend. It's that consumers are prioritizing their spending.

They are starting to spend less on gasoline, thankfully, because gasoline prices are coming down. They're spending a lot less on durable goods because they don't need as much furniture anymore. But they're continuing to prioritize month-over-month spending on food and drinking places. And, again, we see that in the real-time data for June as well.

So I don't see a big change of trend here. But perhaps, some paring back and maybe the declines in the fine dining segment for Darden could be due to some of the corporates that are maybe trying to rein in the expenses. But I think, overall, this segment will continue to remain strong.

DIANE KING HALL: So less Capital Grille but, certainly, Olive Garden still in play here. But let's talk about the consumer as we get towards fall. Obviously, you point to consumers holding about 1 and 1/2 trillion in excess savings. That could certainly take a hit, just continue to play out the naysayer aspect of this, in the fall once those student loan payments reactivate.

What is your expectation there, Anastasia?

ANASTASIA AMOROSO: Yeah. It is going to be a hit to the discretionary income of some consumers. But when we look at the numbers for student loans, once the repayments do kick in, it's something like 1.6% to 2% of discretionary income. So it's not as big of an amount as one might imagine. And also, when you think about individuals who may be making those student loan repayments, there might be some of the higher income individuals. So that might be even smaller than that.

So I do agree with you, Diane, that it is still a drag on consumption that will kick in. But I would say, it's a very incremental one versus that would derail the whole consumer story.

JULIE HYMAN: What's interesting is how resilient we have seen the consumer, and also, just corporate America broadly. Our Myles Udland in the "Morning Brief" today writing about that, and how earnings-- earnings tend to beat estimates. Let's be honest. But this season, in particular, this past season, we saw earnings beat estimates by a pretty big margin. Are we going to be able to continue to see that cadence fueled in part by the consumer? But of course, corporate clients are going to need to participate in that too.

ANASTASIA AMOROSO: Julie, I'm actually fairly optimistic on the earnings picture. And I know that the estimates for, especially the third quarter. And the fourth quarter, are definitely more optimistic than the first quarters of this year.

But the reason I'm optimistic is because when you think about what's driving those earnings, it's, how is the economy performing? And what can you do in terms of your bottom line and cost savings? And speaking of the economy, it outperformed in the first quarter. And it's still on track to outperform in the second quarter relative to consensus that was expecting 0% GDP growth.

And instead, we're coming in on track to 1.8%. So as a result, what was a trend of earnings estimates downgrades is actually a trend of upgrades to earnings right now. So I think that bodes really well.

And then the second part of it is cost savings. Companies did not just sit idly worried about the economic outlook. They cut costs where it made sense. They went into this margin preservation mode. And I think that too should support the earnings story.