Why Darden Restaurants, Inc. Stock Slumped Today

What happened

Shares of Darden Restaurants, Inc. (NYSE: DRI) were heading lower today after the Olive Garden-parent posted weaker-than-expected sales growth and operating expenses that outgrew revenue. Those result overshadowed strong earnings-per-share growth as the stock was down 6.9% as of 11:34 a.m. EDT.

So what

Darden said comparable sales at legacy brands increased 2% in the quarter, a solid clip, and overall revenue increased 13.3%, helped by the addition of 154 Cheddar's Scratch Kitchen locations, to $2.13 billion. However, that was short of estimates at $2.15 billion. Adjusted operating income was up just 2% as labor costs surged 18.2% in the quarter, but adjusted earnings per share jumped 29.5% to $1.71 due to a tax benefit, which topped expectations at $1.64.

The outside of an Olive Garden restaurant.

Image source: Darden Restaurants.

"Our solid performance this quarter is a result of our focus on executing our back-to-basics operating philosophy to deliver memorable guest experiences," CEO Gene Lee said. "Our strategy continues to work, creating an environment that allowed us to invest in our people and our business, strengthen our balance sheet and return nearly $100 million to shareholders during the quarter."

Now what

With the help of the tax benefit, Darden raised its full-year earnings per share forecast from $4.70-$4.78 to $4.75-$4.80 as it sees its effective tax rate falling from 18% to 16%-16.5%. However, it kept the rest of its forecast the same, calling for 2% comparable sales growth and overall revenue growth of 13%, indicating no change in its business fundamentals. Considering the increased earnings forecast, today's sell-off is somewhat surprising, but investors may have been expecting a larger benefit from the tax reform law. Additionally, rising labor costs could continue to weigh on bottom-line growth.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.