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Darden Restaurants (DRI) reported fiscal third quarter results with the company, which owns restaurant chains like Olive Garden and LongHorn Steakhouse, reporting sales that fell short of estimates.
BTIG managing director and restaurant analyst Peter Saleh joins Catalysts with Madison Mills and StoneX senior adviser Jon Hilsenrath to discuss the earnings results, outline his bull case for the stock, and examine the restaurant space amid uncertain consumer sentiment.
To watch more expert insights and analysis on the latest market action, check out more Catalysts here.
Darden restaurants revenue falling short of estimates in its fiscal third quarter. Still, sales were up more than 6% compared to a year earlier, boosted by the acquisition of Chewy's with more than 100 locations. During this now with more, we've got Peter Sali BTIG's managing director and restaurant analyst. Hey Peter, talk me through this print because it's interesting. We're seeing some disappointment in some of the areas that typically see success for the business like Olive Garden and Longhorn. What is your reaction to the results?
Yeah, so thanks for having me, Deanna. I would say the results for the quarter were kind of lackluster. They did didn't miss by about 100 basis points on same-store sales. Uh the EPS is essentially in line. So, I think like the stock reaction is not based on what happened in the last quarter, it's more based on the commentary that they made uh for March, which suggested that so far in the fiscal fourth quarter for them, which is March, April and May, uh they are trending above 3% same store sales growth. And that is a meaningful acceleration in the two-year stack from what we just saw in the most recent quarter. So, there's been an acceleration in same store sales when uh essentially the sentiment among consumers is is pretty negative. Uh so I think that took investors by surprise a little bit this morning.
You've got a buy rating on the stock. What's your bull case?
So, our bull case here is that this company can continue to invest in incremental advertising to drive uh same store sales, primarily at Olive Garden, uh and a little bit at Longhorn. Uh they've pulled back significantly on promotions and advertising uh since COVID, and they've been bringing some of that more back online over the past several years. So that's uh primarily the the the base case for for our uh by thesis here. We also think the addition of the Uber Direct partnership uh is really going to drive some meaningful uh incremental same store sales. They talked about seeing 40 to 50% incremental orders on the on the Uber partnership in the most recent uh quarter. I think that's only set to accelerate as we go forward with some incremental advertising.
Peter, can you help us put together some of the macro story here? On the one hand, as you noted, consumer sentiment uh is down. On the other hand, we're talking about an acceleration of same store sales growth uh here at Darden. What's going on? How do those two pieces fit together?
So historically, in this sector, it's job growth and income growth that drive same store sales and and transactions. Uh and so long as we are seeing job growth and we're seeing incomes continue to rise, uh the restaurant industry should remain on a healthy footing. That said, Darden's numbers are outpacing the industry. So they're taking share. Uh so that's the good news for Darden. I still think the industry is struggling somewhat, but uh generally speaking, probably the the sentiment has not translated uh into um you know, decline in consumer spending so far for the restaurant space.
And what are you seeing broadly in your sector on pricing and inflation? We've been talking a lot about egg prices going up so much. Now we're seeing the potential for avocados and tariff prices going up. Are you seeing any momentum on the pricing front?
So I I think you're starting to see the restaurants, they're taking a little bit of price, they're being really reluctant to raise prices too much. Uh there was a post Covid, you know, between FY 19 and 2023, restaurant pricing QLSR was up 40% or so, casual dining in the 20% range. Those numbers are far outside. I think they're reluctant to raise prices too quickly here, despite what we're seeing is a little bit more inflation. Darden did call out that their fiscal fourth quarter would be, you know, more inflation on commodities than they have seen in the recent past. So, um we're starting to see inflation on food creep up a little bit, uh but the restaurants are they are being a little bit reluctant, which is a smart move to raise, to take a little bit less price going forward.
The latest example of corporations being reluctant and uncertain. Peter, thank you so much. Really appreciate it.