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Darden Restaurants beats earnings, but this analyst is cautious

Shares of Darden Restaurants (DRI) are rising following the company's better-than-expected earnings report, surpassing both revenue and profit estimates. Despite this beat, Guggenheim Securities Senior Analyst Gregory Francfort joins Catalysts to discuss his decision to trim estimates for the company's upcoming quarter.

Francfort acknowledges Darden's position as the leading full-service restaurant chain but points out that "they continue to see a little bit of pressure on the low-end consumer." He also notes a shift in customer behavior, with "less check management" occurring, leading him to conclude that "there is a mixed read on the consumer" due to this dynamic.

Over the past few years, Darden has maintained prices approximately 6-7% below its competitors, according to Francfort. However, this pricing strategy hasn't translated into significant traffic growth as consumers grappled with inflationary pressures. While the most recent quarter showed modest improvement in this trend, Francfort maintains a cautious outlook on the company's forward prospects.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

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This post was written by Angel Smith

Video transcript

We're moving on to another name here.

Shares of Garden and restaurants moving higher this morning after the company beat earnings estimates up a little over 1.5% there.

Its acquisition of Ruth Chris Steakhouse fuel a 6.8% jump in net sales for more on this.

We're going to bring in Gregory Frank for he is good senior analyst.

Thank you so much for being here with us Gregory.

Listen, I I'm really interested in this because you're trimming your estimates and price target on Dan slightly, but you still think it's one of the highest quality assets in the restaurant space.

Talk to me about the single biggest driver in your decision here.

Sure.

Sure.

So we, yeah, we trimmed um estimates into the quarter.

Um and the company just reported this morning, um uh same store sales of flat, uh which was a little bit below consensus.

Um, you know, earnings was a little bit above consensus as margins beat.

Um And, and one of the things that I think is interesting is Darden is the the best bellwether for full service restaurant stocks in, in the space that we cover.

Um they, they've continued to see, um, a little bit of pressure on the low end consumer.

But one of the things that I thought was really interesting from the earnings call this morning was that, uh, they're actually seeing a little bit less check management on the business as a whole.

So a little bit less people, um, or fewer people removing a drink, removing a side, uh, mix was actually relatively flattish in the quarter.

So we're getting a very mixed read on the consumer where um sales are still a little bit soft, but maybe there's a little bit of glim on the, on the margin and on check management side of things, Gregory, let's dive into that because just in case fed chair, Jay Powell is listening to our program right now, getting great insights from you.

I want to make sure that he understands.

So it sounds like the lower end consumer is changing ever so slightly.

But the overall consumer picture looked pretty ok for Dan, am I understanding that correctly?

Yeah, iii I hope, I hope pal listens to us but uh we'll, we'll see the um Yeah, II I so this has been uh the restaurant sector has been under quite a bit of pressure the last few quarters.

Um and Darden is one of the ones that reports off cycle.

So we get AAA different read.

Um They're the biggest full service restaurant chain um in the public markets.

And so what they say matters and, um, they taken a strategy where they've actually underpriced their competitors by about, you know, 6 7% over the last four years.

Um, and the sales have, have kind of been ok.

They've seen some traffic outperforms, but generally their view on the consumer has been that the lower income has been under a bit of pressure and they've seen a bunch of, of, of uh consumers electing not to have a drink, electing not to have a side.

But this quarter was a little bit different.

We, we, we kind of saw that neutralize and maybe there's a glimmer of hope from, from that perspective.

And then we'll be watching that when we get the rest of, uh, rest her earnings coming through in the next month or so.

Well, Gregory, another thing I wanna talk to you about what we have you is this sort of value meal war that we're starting to see amongst some of the more fast food and quick service chains here.

I'm talking about a mcdonald's Burger King and Wendy's.

They've got these more affordable combo meals that they are pushing into the market to kind of drive forward this idea of affordability.

What is that telling you about the state of play when it comes to the fundamentals at these businesses and whether or not that's gonna be a good business decision for them moving forward or is it something that can potentially be a headwind on their profit margins.

Yeah.

II I think what's driving this is it, it's been a very challenging inflation backdrop for restaurants to manage the last few years.

Um You've seen 20 mid, 20% stacked uh food inflation, a similar level of labor inflation.

And so restaurants have had to take a lot of pricing.

Now you're in an environment where labor inflation is still going up four or 5% a year.

Um but food inflation has been kind of flattish and uh the franchisees and Franchisors have a little bit of a different approach where the franchisees are trying to drive bottom line profits.

The franchisors are trying to drive sales.

Um And so the sales have been a little bit soft and they're trying to get the franchisees to be a little bit more restrained on their price increases.

Um And so I think this inflation, we're seeing uh a less inflation than we saw 6, 12 months ago.

Um The, the Franchisors are trying to rein in the franchisees and how much pricing that they've been taking.

Um And so I think that's what's playing out.

You've seen margins up quite a bit the last 12 months.

And I think uh this industry is too competitive for industry wide margins to structurally be higher and, and you're seeing that competed away a bit.

Absolutely.

And just to put a button on that, the president noting and the company's prices for mcdonald's increasing by an average of 40% since 2019 across those franchises to offset those rising costs and customers certainly taking note of that.

Gregory.

Thanks so much for joining us this morning.

That was Gregory Frankfurt.

He's Guggenheim Securities Senior Analyst.