Guggenheim Senior Analyst Gregory Francfort joins Yahoo Finance Live to discuss earnings for Darden Restaurants, consumer spending, weathering a recession, and the outlook for growth.
JULIE HYMAN: Guggenheim is cooking up a positive outlook for Darden Restaurants, initiating coverage with a buy rating and a $170 price target, saying the company will continue to take market share from its competitors despite a challenging backdrop. Guggenheim Senior Analyst Gregory Francfort joins us now.
Thanks for being here. So as you look at Darden, what makes it sort of-- is it executing better in this environment? You also talk about, in your note, that there just aren't a lot of other companies doing exactly what Darden does right now. Explain to us why.
GREGORY FRANCFORT: Yeah, I mean, Darden has been the best-in-class full-service operator for the last several years. Their execution, their comps have significantly outpaced peers, and it's part of the reason why they get a premium multiple. The shares traded 12 times EBITDA. And a lot of the other peers that are of lower growth are trading at six to eight times, and we think the valuation is deserved, and more some.
BRIAN SOZZI: Greg, I'm on the Olive Garden website right now, of course, owned by Darden. And for Valentine's Day, they're teasing $18 wine bottles, $6 take-home meals. Those are really good deals I mean, is that a sign that they're having problems getting traffic into the restaurant given they have had to raise prices? And do you see them having to promote more?
GREGORY FRANCFORT: No, I think that's a sign that they're trying to capture the romantic customer over Valentine's Day. But to be honest, marketing spend is down from 3% of sales before COVID to just over 1% of sales. The consumer remains extremely healthy. We've seen no evidence that they've really had to cut prices in any way or increase discounting in any way.
It seems every indication we have is that January for the consumer has started off extremely strong. And we think that's going to really benefit Darden. I mean, you've seen a couple large earnings reports from restaurants, McDonald's and Starbucks, where the US comps were up 10. I think that's evidence that the consumer is very healthy and spending in restaurants right now.
BRAD SMITH: Does this look like a Darden Restaurants operation that has already started recession proofing its business? And is it recession proof?
GREGORY FRANCFORT: You know, that's a great question. They really did not comp down materially during the last recession, and I think that-- part of the reason for that is the fact that Olive Garden is a lower price offering than many of its peers. The Never Ending Pasta Bowl is a great value for Olive Garden and for Darden as a whole.
But-- so they weathered the last recession relatively well. I don't think any full-service restaurant company is going to be completely immune from challenges if we get them. Generally, as a whole, full-service restaurants saw 6% to 8% negative comps during the last recession. Darden just happened to outperform materially.
JULIE HYMAN: Are they going to be able to hold the pricing on something like that Never Ending Pasta Bowl, right? Or are you-- or are we going to see either price increases abate or even prices go down a little bit to keep those customers coming in the door?
GREGORY FRANCFORT: We have seen them increase prices. They've actually taken prices up year-over-year about 6%, which is less than most restaurants. Most restaurants we're seeing are taking prices up 8% to 10% right now. Darden has taken them up a little bit less than peers.
But-- but no company-- I mean, the restaurant industry right now is dealing with 10% to 15% food inflation, 8% to 12% labor inflation, a quit rate that remains at 5.6% in the most recent JOLTS survey, well above 4 and 1/2% from before COVID. So there are a lot of cost pressures in this business. Everyone's taking pricing. Darden is just taking a little bit less than peers.
BRIAN SOZZI: Greg, we just had Kevin Hochman on, the CEO of Brinker, and they had a blowout quarter for Maggiano's. And just listening to hear you talk, Olive Garden is set up for another good quarter as well. Is just Italian food coming back in flavor? Is there just something about these flavors that are working in this current environment again?
GREGORY FRANCFORT: I think Italian always works. I mean, it's-- the big categories in this industry, Italian, steakhouses, the large players seem to find success. And I think Olive Garden is going to be right there with Maggiano's in terms of a sales-- a strong sales performance in the coming quarter. We modeled-- we're a few points ahead of the Street, and we think the top-line trends are going to continue. Generally, we're thinking that restaurant sales are going to be pretty strong for the next three to six months.
BRAD SMITH: These are businesses that had all invested a lot in curbside pick up to go. How has that held up from your perspective, especially given the growth in the digital ordering that many businesses have just had to layer in to how they operate and how they facilitate that connection point with the consumer?
GREGORY FRANCFORT: Yeah, it's a fantastic question. I think delivery is definitely going to stay higher than it ran before COVID, off-premise generally. We are seeing some degradation in sales. Chipotle is one example where you look last year, they were 24% of delivery in the quarter. And this year in the third quarter, they were 17% of sales.
So there is some waning in terms of what off-premises is doing and how consumers are behaving. They are getting back to somewhat normal behaviors. But I think our expectation is that you continue to see a level-- even out at a level that remains above where pre-COVID levels were.
JULIE HYMAN: Gregory Francfort--
BRIAN SOZZI: We're going to double date. Me and Brad are double dating--
BRAD SMITH: Let's go.
BRIAN SOZZI: --on Valentine's Day at Olive Garden. We're going to do it. We didn't tell you, Julie.
GREGORY FRANCFORT: Hey, can I join you guys?
BRIAN SOZZI: I'm just totally kidding. Oh. I heard you were going to White Castle. White Castle's doing their Valentine's Day, Greg. I thought you were going there. It's OK.
JULIE HYMAN: If not--
GREGORY FRANCFORT: Maybe.
JULIE HYMAN: I mean, Olive Garden's great. But if my husband took me to Olive Garden for Valentine's Day, not sure that would fly. All right, Guggenheim Senior Analyst Gregory Francfort, thanks so much--
GREGORY FRANCFORT: Thanks, guys.
JULIE HYMAN: --for being here. Appreciate it.