On its face, this was a good quarter for Darden Restaurants: The company beat earnings by a modest 3 percent and revenue was slightly above estimates. But let’s dive deeper to reveal some concerns. The restaurant operator, whose brands include Olive Garden and The Capital Grill, just completed its fiscal year and reported its fourth-quarter results. Same-store sales in the quarter were significantly higher than estimates (up 11.7% versus 9.2% by StreetAccount’s estimates). Those strong compasses actually helped propel the bottom-line beat — as margins were lower than expected due to inflationary pressures. Restaurant margin came in at 20.1% versus the 21.8% estimate, and it kept operating margin well below the consensus (13.0% versus the 13.6% estimate). Watch for margin pressure as Darden’s new fiscal year begins. While the midpoints of sales and compass guidance are above consensus for the year, earnings per-share guidance of $7.40 to $8 is well below the consensus of $8.11. So why the margin problem? Inflation in the current quarter is coming to a head before moderating. On a call with analysts, Chief Financial Officer Raj Vennam said, “We expect commodity inflation to rise from 12% in Q4 in the first quarter and then moderate substantially, making the year almost flat. ” The company is raising menu prices to help offset inflation, but that will only push the limit so far. For this reason, the price increase is not covering all the inflation that Darden is facing. Vennam elaborated on the call. “We’re choosing not to pass along all of our inflation to our guests. And for some reason, right? We don’t think all of this cost is sustainable — for example, chicken, dairy, and wheat, which are one of our A significant portion of the basket, especially in Olive Garden, is extremely — at a very high level right now,” he said. “We don’t believe it’s too sticky over the long term.” Darden expects that by keeping prices under control, it will be at a competitive advantage when the recession hits, and guests are checking their spending more closely. Segmentation of clients Investors also got some insight into the status of Darden’s guests. One thing to note is that there seems to be a slight split with the consumer. In the fourth quarter, same-store sales were up 6.5% — lower than estimates at the more moderately priced Olive Garden. Higher-priced Longhorn Steakhouse comps were up 10.6% — nearly double estimates. The company’s fine dining segment (think Eddie V’s and The Capital Grille) saw growth of 34.5%, up from an estimated 21.3%. High-end customers aren’t hesitant to spend the money. On the call, Darden’s CEO Rick Cardenas said, “Our data indicates that the high-end consumer has not seen the same impact as consumers on the lower end of the spectrum.” He noted that lower-end consumers, especially in the more value-oriented Cheddar’s Scratch Kitchen, “have shown signs of check management … [consumer] A little showing.” This echoed the sentiment Kroger CEO Rodney McMullen described last week. He discussed how the grocery store saw two types of customers emerging. “Many customers shop for premium products throughout the store. Continuing, which includes private selection, Murray’s Cheese. , and deluxe dining solutions,” he said. “For other customers, whose [budgets] Food and fuel are more directly affected by inflation, they are actively looking for ways to protect.” Ultimately, a diversified portfolio of brands could help Darden weather an economic downturn—especially if high. End customer spending continues. On analysts’ call, Darden’s Cardenas said, “We will price our higher-end brands or a more affluent consumer who can absorb some of that value and lower-end.” Slightly less elastic than other brands.