Darden Restaurants (DRI +7.4%) is experiencing a notable stock uptick following its Q1 earnings report. The company, which operates Olive Garden, LongHorn Steakhouse, Ruth's Chris, and soon Chuy's, missed on EPS but had revenue in line with expectations. Additionally, Darden revealed a multi-year delivery partnership with Uber (UBER, Financial), starting with Olive Garden in late 2024.
Earnings: A significant drop in traffic during July led to lower-than-expected Q1 EPS. However, sales trends rebounded in August, resulting in flat comps for the month. The first three weeks of September have shown further improvement, leading to positive comps quarter-to-date for Q2 (Nov). Darden reaffirmed its FY25 EPS guidance at $9.40-9.60.
Despite Q1 sales softness, DRI delivered industry-leading margins and generated more adjusted EBITDA than the prior year, showcasing the durability and cash generation of its business model. DRI outperformed the industry with comps 140 bps better than the industry average, driven by Longhorn's strong performance.
Comps: DRI posted Q1 consolidated comps of -1.1% (OG -2.9%, LS +3.7%, Fine Dining -6.0%), softer than Q4's flat comps (OG -1.5%, LS +4.0%, Fine Dining -2.6%). Darden reaffirmed all aspects of its FY25 guidance, including comp guidance at +1-2%.
Uber Partnership: The deal will allow customers to order on-demand delivery via Darden restaurant channels, with Uber Direct handling delivery. A pilot will begin in late 2024, with national expansion at Olive Garden expected by May 2025. DRI is considering expanding this service to other brands.
Chuy's (CHUY, Financial) Acquisition: DRI is on track to close the deal in mid-October, pending Chuy's shareholder approval. Financing has been secured, and the team that integrated Ruth's Chris is ready to manage Chuy's integration. The deal is expected to be neutral to adjusted EPS for this fiscal year.
Overall, the stock's rise despite the EPS miss suggests that the Uber deal is positively influencing investor sentiment. The July sales dip is seen as a temporary issue, with recovery in August and September easing concerns. DRI's reaffirmed full-year guidance has also helped calm investor nerves. This report, however, raises some concerns for other sit-down restaurant stocks like BJRI, BLMN, CAKE, EAT, TXRH, which are set to report earnings next month.
