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Mamma Mia! Darden Restaurants Pops on Olive Garden's Comps

By Motley Fool Staff – Dec 23, 2017 at 12:15AM

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A strong second quarter broadly for the restaurant operator, but the pasta-centric chain accounts for half its profits.

In this segment of the Market Foolery podcast, host Mac Greer, Total Income's Ron Gross, and Million Dollar Portfolio's Jason Moser weigh in on Darden Restaurants' (DRI 0.83%) fiscal second quarter. Olive Garden's to-go sales continue to shoot higher, supporting the whole company's same-store sales growth. And its recent purchase of Cheddar's Scratch Kitchen is poised to pay dividends too. So is the investment thesis here solid, despite the industry's ongoing issues?

A full transcript follows the video.

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This video was recorded on Dec. 19, 2017.

Mac Greer: Shares of Darden Restaurants up big today on strong second-quarter results. Guys, Olive Garden, which is Darden's motherlode, Olive Garden sales up 3% for the quarter. Olive Garden makes up around half of Darden's profits.

Jason Moser: Yep. This is the crown jewel for Darden, Olive Garden is. Our very own Steve Broido, every time we talk about it, he professes his love. He got one of those pasta passes, I have to assume, right?

Ron Gross: They're hard to get.

Moser: They bumped it up to, like, 22,000 of them this year. It's just amazing to me how much room that business has run in such a short period of time. Because, like you said, it's about half of the overall company. They've really made a lot of investments in the to-go concept with Olive Garden, and it has done so well. Every quarter, it's growing double digits. This quarter, to-go sales grew 12%, really contributing to that overall same-store sales growth with Darden as a whole. It was Darden's 13th consecutive quarter of same-store sales growth. And the same-store sales growth was healthy. It was some growth in traffic, some growth in pricing, a healthy mix of the food and offerings being sold. So all in all, it's not a business I would put at the top of my watch list just because the restaurant business is generally so tough. But wow, they've really been doing well.

Gross: It started to turn when Starboard Value came in and told them to stop salting the water so much and the pasta would last longer.

Greer: Yes.

Gross: It's all them.

Greer: Remember that report? How long was that report? They wrote this extensive, comprehensive report.

Gross: Those are good guys. I know them very well.

Greer: And about what overserving breadsticks. They were serving too many breadsticks?

Gross: Yeah, there were a lot of cost-cutting measures.

Greer: That's a wonderful report if you have some spare time over the holidays.

Moser: The other thing to remember is the acquisition of Cheddar's Scratch Kitchen. That's going to be something that I think adds considerably over time, and part of it is just because the unit economics of the stores are so attractive. They're bringing in around $4.5 million average in sales annually. And the average check, around $13.50. So it's not like some high-dollar offering. It's a pretty convenient, a little bit of a differentiated offering that I think is going to contribute to their bottom line for years to come.

Jason Moser has no position in any of the stocks mentioned. Mac Greer has no position in any of the stocks mentioned. Ron Gross 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.

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