The company has been reluctant to use third-party delivery in the past.
Shares of Darden Restaurants (DRI -0.94%) jumped after the company inked a new partnership with Uber Eats, the food delivery service of Uber Technologies (UBER 3.65%). The news overshadowed the relatively lackluster, fiscal first-quarter results the company posted.
Despite the Uber-fueled gains, the stock is still up only modestly on the year. Let’s examine the restaurant operator’s latest results and deal with Uber to see if the stock is a buy on this news.
Disappointing results and Uber partnership
Darden owns and operates a number of sit-down restaurant concepts, although its largest is Italian chain Olive Garden, which accounts for over 40% of its sales.
The concept struggled in the quarter, with sales down 1.5% to $1.21 billion and segment profit falling 5.1% to $249 million. Same-store sales slipped 2.9%.
Things were worse for the company’s Fine Dining segment, which includes high-end restaurant chains such as Capital Grille, Ruth’s Chris, and Eddie V. The segment saw its revenue edge up 2% to $278.9 million, but its same-restaurant sales declined by 6%. Segment profits fell by 5.3% to $37.6 million.
The one bright spot in the quarter was Darden’s second-largest concept: LongHorn Steakhouse. The steakhouse’s revenue jumped 6.5% to $713.5 million on a 3.7% increase in comparable-store sales. Segment profit increased 8.7% to $127.6 million.
| Metric | Olive Garden | LongHorn | Fine Dining | Other |
|---|---|---|---|---|
| Revenue growth | -1.5% | 6.5% | 2% | -0.7% |
| Same-store sales | -2.9% | 3.7% | -6% | -1.8% |
| Profit growth | -5.1% | 8.7% | -5.3% | -0.7% |
Source: Darden
Overall, the company’s total sales rose 1% to $2.76 billion, helped by the addition of 42 new restaurant locations, while same-store sales slipped 1.1%. Adjusted earnings per share (EPS) fell 1.7% to $1.75. The results were below the $2.8 billion in revenue and $1.83 in EPS that analysts had been expecting.
Looking ahead, the company reiterated its full-year fiscal 2025 guidance calling for sales of $11.8 billion to $11.9 billion on comparable-store growth of 1% to 2%. It is forecasting adjusted EPS of between $9.40 and $9.60. It plans to open between 45 to 50 new restaurants.
| Metric | FY 2025 Guidance |
|---|---|
| Revenue | $11.8 billion to $11.9 billion |
| Same-store sales | 1% to 2% |
| Adjusted EPD | $9.40 to $9.60 |
Source: Darden
Overshadowing Darden’s results was the announcement that the company signed a two-year exclusive deal with Uber Eats for it to be Olive Garden’s third-party delivery service.
While Darden has done tests in the past with third-party delivery companies, it has been reluctant to use them because it needed to protect its very large off-premise business, it didn’t like the economics, and it wasn’t sure a third-party delivery service would add incremental sales.
The company said the current deal was deigned to be both transparent with customers and to not impact its margins. It said the prices of its delivery menu will remain the same as in restaurant and that guests will pay a $5 delivery charge and 5% on their orders, which will come out to around $7 based on its average check size.
Image source: Getty Images.
Is Darden a buy after the Uber announcement?
Darden believes the partnership will be an incremental, long-term driver of sales but will take time to scale since orders will be placed through its own app or website. Since Uber Eats customers are not going to be able to order Olive Garden directly from its app, the company will not get the benefit of getting more exposure if Olive Garden was featured on its app.
Olive Garden currently does about $1 billion in to-go sales, so how much in incremental-sales delivery adds to that will determine if can be a growth driver for the company. The company is believed to have a pretty diverse customer base, but one that can skew a little older. So while there should be a sales uplift, how much is very much in question.
Trading at a forward price-to-earnings (P/E) ratio of 18 based on this fiscal year’s analyst estimates, the stock is not overly expensive. The company is dealing with some headwinds, but it continues to build out locations and its restaurant portfolio. It also isn’t afraid to make acquisitions to grow. Last year, it bought Ruth’s Chris and is currently in the process of buying Mexican restaurant Chuy’s.
DRI PE Ratio (Forward) data by YCharts.
All in all, I think the stock looks fairly valued. While I like the Uber deal, I think only time will tell how incremental it will be to sales. As such, if I owned it, I would keep on holding, but I would not be running to buy shares on this news.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool has a disclosure policy.