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Darden Restaurants (DRI +7.4%) is making a strong move following its Q1 (Aug) earnings report this morning. This operator of several restaurant chains (Olive Garden, LongHorn Steakhouse, Ruth's Chris, and soon to own Chuy's) missed pretty big on EPS while revenue was generally in-line. In addition to earnings, Darden announced an exclusive multi-year delivery partnership with Uber (UBER), set to begin with Olive Garden in late 2024.

• Let's start with earnings. The company was surprised by a significant step down in traffic during July, which led to Q1 EPS being lower than expected. However, sales trends rebounded in August, resulting in flat comps for the month. The first three weeks of September have further improved, resulting in positive comps quarter-to-date for Q2 (Nov). Considering this recovery as well as planned initiatives, Darden reaffirmed FY25 EPS guidance at $9.40-9.60.
• Despite the sales softness in Q1, DRI says it delivered industry-leading margins and generated more adjusted EBITDA than the prior year, highlighting the durability and cash generation of its business model. Also, DRI outperformed the industry again this quarter with comps that were 140 bps better than the industry. Its gap relative to the industry improved from Q4, driven by the outperformance of Longhorn.
• Turning to comps, DRI posted Q1 consolidated comps of -1.1% (OG -2.9%, LS +3.7%, Fine Dining -6.0%), which was softer than Q4's flat comps (OG -1.5%, LS +4.0%, Fine Dining -2.6%). Darden said it is reaffirming all aspects of its FY25 guidance, which we read to mean it's also reaffirming FY25 comp guidance at +1-2%.
• Turning to the Uber deal, it will enable customers to order on-demand delivery via Darden restaurant channels, with delivery handled by Uber Direct. An initial pilot will begin in late 2024 with national expansion at Olive Garden expected to be complete by May 2025. DRI says customers have been asking for home delivery and have said they are willing to pay for the convenience. DRI is currently focusing on Olive Garden, but may expand to other brands.
• Quickly on the pending Chuy's (CHUY) deal, DRI is currently on track to close in mid-October, assuming approval from Chuy's shareholders. DRI has secured financing to support the closing and the team that successfully led the Ruth's Chris integration is ready to bring their expertise and lessons learned to the Chuy's integration. DRI continues to expect the deal will be neutral to adjusted EPS for this fiscal year.

Overall, we are a bit surprised to see the stock up so much despite the EPS miss. We suspect the deal with Uber is more than offsetting concern about the miss. Also, it sounds like the miss was caused by one bad month in July, which is being seen as a blip. Sales have recovered nicely in Aug/Sep. It seems investors are not overly worried. Also, DRI reaffirmed full year guidance, which appears to have eased investor concerns. Nevertheless, this report makes us a bit nervous for other sit down restaurant stocks set to report when earnings season kicks off next month, including BJRI, BLMN, CAKE, EAT, TXRH.