00:00 Speaker A
Shares of Darden, the company behind Olive Garden, Longhorn Steakhouse and others is falling after missing Wall Street’s estimates for first quarter earnings. Joining me now on these results, Gregory Frank for Guggenheim Securities senior analyst. Greg, it’s good to see you. Um, I was struck by something that the company said on the call, that they are going to offer some smaller portions, lower priced entrees at Olive Garden. And I guess the emphasis right now is on value. Is that what’s going on here?
00:46 Gregory Frank
Yeah, I I think it’s it’s hard to know how much of that’s value versus maybe the the customer starting to ask for a little bit healthier portions or at least some cohort of the customer base asking for healthier or smaller portions. Um but that was a lot of focus. I thought it was very interesting. Uh Darden has underpriced the category substantially for the past five years. and and and casual dining has underpriced fast food substantially. And so there there that category has been winning on value and it looks like Darden may be leaning in a little bit more.
01:23 Speaker A
So the healthier portion of this, is this the whole GLP1 wave starting to show up here?
01:31 Gregory Frank
Yeah, uh, CEO, uh, Rick Rick Cardinis didn’t didn’t actually mention that on in the earnings call, but um, there definitely is some portion of the customer base that was asking for smaller portions. Um, and and look, Darden has won and is winning right now with their never-ending passible. They’re they’re running it for, I believe it’s 12 weeks, um, which which is longer than it’s been run in the past. They’re winning on value, on abundance for a price point.
02:04 Speaker A
And it looks like they’re trying to give the customer another option where maybe you can come and you can spend a little bit less, get a little bit less. Um and that’s going to be a new thing they’re trying here. Sort of flexibility here. Uh you know, um all of this said, as I mentioned, the stock is down because we saw comparable sales at Olive Garden, they were up 5.9%, which sounds pretty good, but it is a little bit less, I guess than consensus. Longhorn similar numbers there. Um, were you did you think the numbers were disappointing and if so, why?
02:45 Gregory Frank
Look, the overall comp beat by 30 40 basis points. a lot of that was driven by the other businesses where which were the smaller brands. Cheddar performed the best, which is um one of their smaller brands. Um and Olive Garden or Longhorn missed what we were thinking by yeah, a little bit, 30, 40 basis points. So it wasn’t massively different on the top line. margins were, you know, 30, 40 bips light of where we were expecting on labor and other costs. It just was kind of a little bit light across the board. Um and and in this environment, restaurant stocks seem to be act reacting a lot to small beats and misses.
03:36 Speaker A
Yeah, so I mean it’s not just restaurant stocks, it seems to be happening in a lot of different areas, Greg. All of this said, you still recommend uh a buy on this company. Why? What do you think is still working and do you think growth is going to um reaccelerate a little bit?
03:54 Gregory Frank
Yeah, this has been one of the kind of pre-eminent operators in the restaurant space. Um they’re growing units three to 4% on an annual basis. Uh they’re comping well. I mean even though they missed by a little bit, it was a a high 4% same store sales. That’s a very impressive number. Um and it’s trading at a discount to the S&P 500. So, um, you know, you got a pretty good growth business trading at a discount. Maybe with margins off a little bit here. Um but we would actually view that as as responsible business investment for the long-term. Um and and and we as we’ve said, we recommend the shares.
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