Darden Earnings: Market Loves Uber Eats Deal, We Remain Lukewarm; Shares Expensive

Narrow-moat Darden reported tough fiscal first-quarter results, with $2.76 billion in sales and $1.74 in diluted EPS missing our $2.84 billion and $1.92 respective estimates. Comparable store sales weakness persisted for all brands but LongHorn, including a striking 5.5% traffic decline at the firm's largest Olive Garden banner. Against that backdrop, it was unsurprising to see management reach for a few of the usual levers—menu innovation and a modest uptick in marketing expense. Less expected was the announcement of a first-party delivery launch, brokered through a partnership with Uber Eats. We view that deal as slightly accretive but expect very little change to our $143 fair value estimate on balance as we consider poor quarterly results and a modest expected comparable store sales lift from the launch of first-party delivery. The market's reaction was far more positive, sending shares up 8%-9% in intraday trading. We expect this to reverse over time as the incremental lift proves lower than expected. We believe that the name looks expensive and prefer narrow-moat Papa John's and narrow-moat Restaurant Brands International for investors seeking restaurant exposure.