Please ensure Javascript is enabled for purposes of website accessibility

Darden Restaurants Serves Up Another Delicious Quarter

By Motley Fool Staff – Sep 25, 2018 at 2:59AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The sit-down restaurant space is an increasingly a tough arena to make money in, but the Olive Garden operator has found some formulas for growth even in today's environment.

In this segment from MarketFoolery, host Chris Hill is joined by senior analyst Jason Moser to discuss the most recent quarterly results from Darden Restaurants (DRI 1.20%), owner of Olive Garden, LongHorn Steakhouse, and a half-dozen other chains. Same-store sales were up across the company's operations by 3.3%, and profits beat expectations, too. Olive Garden is the biggest driver of the company's success, and it is going strong. But Darden's 2017 acquisition of Cheddar's Scratch Kitchen is still a bit questionable in its value.

A full transcript follows the video.

10 stocks we like better than Darden Restaurants
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Darden Restaurants wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

This video was recorded on Sept. 20, 2018.

Chris Hill: We have to start, though, with Darden Restaurants, which is the parent company of Olive Garden, Longhorn Steakhouse, Capital Grille, Cheddar's. I still haven't been to a Cheddar's.

Jason Moser: Apparently, a lot of people haven't.

Hill: [laughs] Yeah. Let's start with the same-store sales. Here's the thing -- first quarter profits, higher than expected. Overall, for Darden, this was a really good quarter. Same-store sales across their restaurant group was 3.3%, which is not a huge number, but that's a good number. And it's certainly higher than was expected. We see the stock dropping a little bit, but Darren's had a heck of a last 12 months.

Moser: Yeah. They're having a good year this year, as well. You hit it, you hit the nail on the head there, these were very respectable results for what is a very competitive space. I think it's even tougher now, given the growth in quick service restaurants, the growth in fast casual. The competitive landscape for these guys is more competitive than ever.

Every quarter, we talk about Darden. Olive Garden is what steers the ship. That's their crown jewel. Comps were up 5.3% there. I think they market that concept really well. They recognized their 16th consecutive quarter of comps growth in Olive Garden restaurants. It was interesting to hear the CEO talk about the prospects of delivery. They're not really on board yet with delivery from concepts like Olive Garden. They don't think the economics quite make sense for their customer demographic.

On the flip side of the coin, Cheddar's one where the jury is still out there. It's proving to be a bit of a drag. I'm still actually not sold on that investment. It was not a cheap acquisition, at around $780 million. Total sales for Cheddar's grew 6.5%, but that was really due to opening new stores. It wasn't due to traffic. And that's a problem. And then, when you think about that, then you have to ask yourself the question, well, how many of these Cheddar's stores are they going to plan on opening? If you're having trouble genning up traffic, opening new stores isn't the answer. That just gets more expensive over time. And those are mostly company-operated stores there, anyway.

I think you can see consolidation in the space making sense. You see companies like Yum! Brands, restaurant brands, Darden, you see Cava and Zoës getting together. It does seem like consolidation is a way to really compete more effectively in the space, and I think Darden continues to benefit from that quarter in and quarter out.

Hill: The Cheddar's acquisition really is questionable in this regard: you look over the last five-plus years with Darden restaurants, one of the things that they have been effective at is focusing on the flagship brand of Olive Garden. They sold off Red Lobster, I think it was $2 billion and change, maybe $2.2 billion, something like that. Part of the rationale there was, "Look, we want to focus on Olive Garden." Obviously, they bought Cheddar's for far less money than they got for Red Lobster. But as you said, it was not a cheap acquisition. You look at this quarter, you break out the comps by restaurant, and across the board, it's 3.3%. As you said, leading the way, we've got Olive Garden, 5.3%. Cheddar's comps were negative 4%. I mean, that was a really, really a drag.

Moser: Part of it is, I wonder how much brand awareness is out there for Cheddars. I don't know about you, but I have never seen or heard an ad for Cheddar's ever that I can recall. That potentially is a problem. They do a really good job at marketing their key concepts -- Longhorn Steakhouse, Olive Garden. You see good marketing campaigns centered around those businesses. And that makes sense, those are the two biggest names in the portfolio. But if they want the Cheddar's acquisition to prove out, I think they're going to have to do a little bit of a better job of creating some brand awareness, marketing that out there a little bit. Right now, I just don't think the customer awareness is quite there. Frankly, I can't even tell you what they serve or what kind of demographic they're aiming for. I guess, Cheddar's Scratch Biscuits tells you a little bit about it. But there are a lot of biscuit places out there, Chris. I make some really good biscuits at home, so I don't even know why I have to go to Cheddar's. Why? I make my biscuits at home.

Hill: It will be interesting to see, when we had recently the acquisition of Zoës Kitchen, we talked about on Motley Fool Money at the time, Look, you look at Cava and the success the Cava has had. You look at the acquisition they make of Zoës Kitchen. There's no way they're not converting some of those locations over to Cava. I'm wondering if we're going to see, over the next couple of years, to some small degree, some of these Cheddar's locations get flipped, whether it's to an Olive Garden or to some of the smaller brands, Bahama Breeze, etc.

Moser: It's certainly a possibility. It's hard to say. I wonder, does Cheddar's maybe compete against the Cracker Barrel demographic? I don't know, it's really difficult to say. But I think that is always an out they have, if they decide that concept just isn't working out. They have some other proven concepts in the portfolio that they could certainly shift over to.

Chris Hill has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends ZOES. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.