Why Mr. Market Savored Darden Restaurants’ Latest Results

The restaurant industry may not be in a total slump anymore, but it’s still not what a person would call healthy. So, the fact that Darden Restaurants (NYSE: DRI) could bring some fairly reasonable growth to the table last week got investors enthused.

In this segment from the Motley Fool Money podcast, host Chris Hill and senior Motley Fool analysts Jason Moser, David Kretzmann, and Ron Gross review where the company is getting its best results and where its growth has gone cold. Plus, they discuss the latest plan by Chipotle Mexican Grill (NYSE: CMG) to win back some of its lapsed fans with a handful of promising new menu items.

A full transcript follows the video.

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This video was recorded on June 22, 2018.

Chris Hill: Shares of Darden Restaurants up 15% on Thursday, the parent company of LongHorn Steakhouse, The Capital Grille, Olive Garden and other restaurant brands. Darden’s fourth quarter report impressed Wall Street. Ron, their guidance for the new fiscal year was pretty strong, too.

Ron Gross: Pretty good, especially in a time where restaurants are struggling, these results that are mediocre look pretty stellar. You have adjusted EPS up 17% on an increase of sales of 10%, and blended comps across all of their restaurants up 2.2%, with folks like Olive Garden and Capital Grille leading the way. Eddie V’s, actually, which a lot of people don’t know, was up 3.6%, which is really strong.

The one weak place to point to here is their most recent acquisition — which, we love the name –Cheddar’s Scratch, that they acquired about a year ago for $780 million. Comp sales there were down almost 5%. So, they have some work to do there. If they firm that up, then you’ll really see the overall results pick up.

Jason Moser: I didn’t look into this, but did you check out how the Olive Garden To Go segment had done this quarter? I just know that quarter in, quarter out, they’ve been recording this double-digit growth with Olive Garden To Go.

Gross: I didn’t see any specific metrics in terms of numbers, but comments were really favorable.

David Kretzmann: What about metrics on Italian nachos?

Moser: [laughs] That’s right!

Hill: We’ll go to our in-house expert in just a second. Ron, just in looking at the Darden website and the brands that they have, did you get any sense from this recent quarter of how they’re managing — because there was a point in time, I’m thinking primarily of when they came out and said they were going to sell off Red Lobster — that they were struggling with managing multiple brands.

Gross: They were struggling. Activist investors at Starboard came in and told them to stop salting the water so much, which seems to be the big catalyst there. But clearly, they needed to get their act together. They did sell off Red Lobster. But then they went ahead and acquired Cheddar. So, it appears that they’re not afraid to have a diversified portfolio. So far, at least on a blended basis, it’s working out.

Hill: Let’s go to our man behind the glass, Steve Broido. Steve, any comment on the To Go question that Jason raised?

Steve Broido: You know, I’ve never used it. It sounds like an exciting opportunity, potentially this weekend.

Hill: [laughs] Here’s another opportunity: looking at the Olive Garden website, they’re promoting something called “create your own lasagna.” Have you taken advantage of that, and do you have any recommendations on what we should do when creating our own lasagna?

Broido: I have not, and I wouldn’t even know where to start. That sounds so complicated to me. What would you create?

Hill: I don’t know, maybe it’s kind of like create your own pizza.

Moser: It’s just layers, Steve! Pasta, layer, pasta, layer. Just figure out what you want in the middle.

Kretzmann: Get some cheese in there.

Hill: Chipotle is testing out some new menu items. On Thursday, Chipotle announced it is adding five new menu items to its test kitchen in New York City. Among the items are quesadillas, chocolate milkshake, and avocado tostadas — which I have to believe, guys, is aimed at David Kretzmann’s generation. That’s avocado toast. You millennials are all about that, right?

Kretzmann: That’s gold for Instagram, Chris. That’s what we’re all about. They’re also looking at nachos. Like you mentioned, this is just a small test in their New York City test kitchen, potentially rolling out regionally, and then nationally, they’ll keep tweaking the recipes. The big challenge here, which CEO Brian Niccol addressed, is that they need to find the right process to fit this in to their existing assembly line without slowing throughput and building up the line as people wait for their food.

Hill: That’s the thing. I look at this list, Ron, I think, with Chipotle, with any fast-casual restaurant, they’re focused on that throughput, how many people can we get through the line as quickly as possible. These are items that take a little bit more time, and in some cases, they require new equipment.

Gross: For sure. There’ll definitely be some capital expenditures associated if they roll it out wide. They have to balance the menu getting boring with the throughput taking a hit. There is a balance there. My concern is, if you recall, the queso does not have stabilizers. So, to create nachos without stabilizers, I mean, it’s chaos.

Hill: I think Ron’s right about that.

Kretzmann: Chipotle has been rolling out a kitchen in the back of the restaurants. I would suspect, some of these more complicated items, they might stick back there, really encourage people to order ahead on the website or through the app. That way, you’re not disrupting that line of people in the stores themselves. Something else that Brian Niccol mentioned is that they’ll be rolling out one or two promotional items during the year, more one-time items that they launch for a few weeks — similar to Taco Bell, where he came from.

Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of Chipotle Mexican Grill. Jason Moser owns shares of Chipotle Mexican Grill. Ron Gross has no position in any of the stocks mentioned. Steve Broido has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

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