Veteran trader rates parent Olive Garden’s share price after earnings

It all started with the Green Frog.

This may sound like the beginning of Jim Henson’s biography and how the creator of The Muppets came up with Kermit the Frog.

Related: Analysts shift gears on Carvana stock price targets on growth outlook

But this is actually the story of Bill Darden, an American businessman and namesake of Darden restaurants (DRI) the multibrand restaurant operator.

In 1938, Darden was just 19 years old when he opened his first restaurant, The Green Frog, in Waycross, Georgia. Darden opened the first Red Lobster restaurant in Lakeland, Florida in 1968.

The chain — which recently emerged from Chapter 11 bankruptcy protection — was sold to General Mills (GIS) in 1970 and has gone through quite a history. General Mills later exited the restaurant business and named the new company after Darden.

Darden Restaurants sold Red Lobster in 2014, and today the company owns brands such as Olive Garden, Longhorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s.

The company said in July it was acquiring Austin Tex-Mex chain Chuy’s in a $605 million deal that is scheduled to close next month.

Darden CFO notes ‘significant step’

The restaurant industry has taken a few hits lately.

Food and restaurant prices continue to rise, even as overall inflation slows. Restaurant prices are rising much faster than groceries, according to Vericast Restaurant TrendWatch 2024. Restaurant costs rose 5.1% annually, while groceries rose 1.2%.

Related: Iconic Campbell’s Soup Makes Bold Decision Some Don’t Like

More than two-thirds (68%) of respondents said they are switching down from restaurant meals to grocery store food to avoid rising costs, the marketing services firm said. Over 71% of Gen Z and Millennials said they do.

Additionally, consumers look for special deals when choosing to dine out, with 30% of respondents saying they won’t try a restaurant without a coupon or discount offer.

Darden Restaurants felt the pressure. The company’s first-quarter earnings report on Sept. 19 missed Wall Street forecasts.

“While we did not meet our expectations for the first quarter, I believe in the strength of our business and am confident that the strategy we developed nearly 10 years ago remains the right one for our company,” Chief Executive Ricardo Cardenas told analysts in winning call time.

Sign up for TheStreet’s free daily newsletter.

On the numbers side, Darden earned $1.75 per share in the quarter, up from $1.59 a year earlier, but short of Wall Street’s call for $1.83.

Revenue rose 1 percent to $2.76 billion, but missed analysts’ consensus estimate of $2.8 billion. Same-store sales fell 1.1% in the quarter.

“Same restaurant sales trends in June were consistent with our fiscal fourth quarter 2024 results, and we were surprised by the significant decline in traffic starting with the July 4th holiday,” said CFO Raj Vennam.

“However, sales trends rebounded in August, resulting in flat same-restaurant sales for the month. The first three weeks of September improved further, resulting in positive quarter-to-date sales across all our segments except fine dining,” he added. .

Additionally, Darden maintained its full-year outlook and noted improving sales trends.

And the company announced a multi-year delivery partnership with Uber (UBER) . The venture is slated to begin with a limited number of Olive Garden locations later this year, with the restaurant chain’s national expansion expected by May 2025.

“We started having more serious discussions about Uber Direct in April, and our teams started working on system integrations in May,” Cardenas said.

“It was obvious to us that the solution addressed our concerns. From a guest perspective, it protects the restaurant experience, as drivers will take orders from the edge of the dashboard in the same way our guests do today.”

“It also enhances the takeout experience by giving guests the option of having someone else take their order,” he said.

Raymond James, Morgan Stanley bullish on DRI

Several investment firms weighed in on Darden’s results, including Raymond James, which raised its price target for the company to $187 from $160 and affirmed an outperform rating on the stock.

More Retail Stock:

• After Chapter 11 bankruptcy closings, retail stores are finding new life
• Popularly troubled essential retail chain emerges from Chapter 11 bankruptcy
• Retailers made millions by charging you chargeback fees, report says

Darden reported “soft” first-quarter results that were more than offset by stronger trends in the current quarter and optimism about Olive Garden’s launch of delivery with Uber, the analyst tells investors in a research note .

The investment firm estimates that over time, the Uber partnership could prove to add low- to mid-single-digit incremental sales.

Morgan Stanley raised the company’s price target for Darden to $188 from $175 and maintained an overweight rating on the stock.

Darden’s story “hasn’t resonated lately, at least from an investor perspective,” but “that’s clearly changed as new factors play out,” the investment firm said. The Uber partnership is the “real news” in the company’s first-quarter report, the firm said.

Morgan Stanley said it would still expect near-term volatility, but adds that Uber, along with its new product, limited-time offers, price-oriented marketing and speed of service, should drive the company.

Veteran trader: DRI’s balance sheet ‘hard to look at’

TheStreet Pro’s Stephen Guilfoyle also took a look at Darden’s numbers and wasn’t happy.

“This balance sheet is a difficult one to look at,” he said. “The current rate is really kind of atrocious. Short-term debt seriously outstrips available cash, which means the debt will have to be rolled over, probably at higher interest rates. Just one man’s opinion, but the balance sheet is not in good shape. .”

The veteran trader said that positive cash flows could correct this problem, adding that “the only problem is that the cash flows are not that positive, and the firm spends more cash than it creates on share buybacks and cash dividends.”

“At some point, I would speculate, the buybacks would have to stop and the dividend would have to be cut,” he said. “Either that or the fundamentals remain messed up (polite term) indefinitely.”

Guilfoyle said he would short Darden restaurants, betting on a drop in the stock price.

“I can’t see myself investing in a corporation with such weak fundamentals, but I can short such a corporation, especially when only 7% of the float is held short,” he said.

Related: Veteran fund manager sees world of pain coming for stocks