The market is underestimating how much rising wages will take a bite out of Darden Restaurant 's earnings despite the recovery in dining-in demand, according to investment firm Evercore ISI. Analyst David Palmer downgraded shares of the Olive Garden parent company to in line from outperform, saying in a note to clients that higher costs will keep the stock from having major upside in the months ahead. "We believe the market largely appreciates the benefits of Darden coming out of the pandemic and cost pressures will dampen the fiscal year outlook towards the middle of the guidance range," the note said. One potential issue is that the company is still well below pre-pandemic staffing levels, which will make bringing in-person dining fully back an expensive proposition. "Darden is still down over 20% labor hours at an Olive Garden (likely down 25%) with in-restaurant traffic down 20%+ . ... And it leaves us wondering the degree of sequential margin compression ahead for Darden as on-premise labor comes back or the limitations to on-premise traffic recovery if labor hours remain significantly below pre-COVID levels," the note said. Evercore trimmed its price target for Darden to $155 per share from $165. The new target is about 7% above where the stock closed on Friday. Shares of Darden are up more than 21% year to date. -CNBC's Michael Bloom contributed to this report.
A take-out order from a Darden Restaurants Inc. Olive Garden location is arranged for a photograph in Tiskilwa, Illinois, U.S.
Daniel Acker | Bloomberg | Getty Images
The market is underestimating how much rising wages will take a bite out of Darden Restaurant