Restaurants leaning ‘into technology’ to better ‘the employee experience': Analyst

Guggenheim Securities Senior Analyst Gregory Francfort joins Yahoo Finance Live to discuss his Buy rating on Darden Restaurants, pricing, inflation, investor sentiment, and the outlook for restaurants.

Video transcript

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BRAD SMITH: Darden is getting bullish-- well, getting a bullish call from Guggenheim, saying that the restaurant could or should be a share gainer, despite current headwinds in the industry. Guggenheim Partners Director Gregory Francort joins us now here. Take us into your thesis. Why so bullish?

GREGORY FRANCORT: Yeah, no, this has been a company, Olive Garden-- I think we spoke a couple of months ago about it. This has been a company that back in '08, '09 outperformed the rest of the industry. The value of pasta and breadsticks and salad resonates with the consumer. And so even if we see a slowdown as you look at the full-service restaurant space, we feel pretty confident that Darden is going to outperform on a go-forward basis.

BRIAN SOZZI: Do you see inflation starting to come down the menus at the restaurants you cover? And what does that mean for pricing?

GREGORY FRANCORT: Yeah, for sure. I mean, when we were looking a year ago, as companies looked out to this year to try to figure out guidance, they were looking to low-to-mid-single-digit food costs and then got bitten by high-single-digit, in some cases low-double-digit food inflation. And that was really a problem for P&Ls for margins for the segment. And a lot of companies were a little bit slow to take pricing.

They have now adjusted. And there is high-single-digit pricing running through a lot of these businesses. Darden is taking pricing up 6% right now. And it's put them in a little bit of a better space as we look into 2023 and 2024 to stabilize margins, grow margins. And we feel a little bit better about the segment, given that backdrop.

BRAD SMITH: On what type of employee base are we talking here, too, I mean, especially considering the restaurant experience is vastly different now than it even was prepandemic. And all of these companies are talking about, OK, where can we make more of a seamless effort or a play for consumers who want even faster service and still the same quality of food experience?

GREGORY FRANCORT: Yeah, I know, a lot of restaurant companies are trying to lean into technology. They're putting a lot more automation in the back of a house, trying to make it so that the employee experience is better. It is a tight labor market. I mean, you look, the JOLTS number, I think, most recently was 9.8 million openings.

If you go back to when this was a looser labor market, when restaurants were not dealing with as much of a tight labor backdrop, that was 5 million. So there's a lot of jobs still out there and a lot of demand for workers. But as we look at this, we think Darden is well positioned, given the fact that it is an employer of choice and the fact that they run the businesses really well and are attractive for their workers.

BRIAN SOZZI: Greg, what's a better play here, a sit-down restaurant, like a Darden, or something more in the fast-casual space, like a Chipotle? Folks that I've talked to recently suggested that sales have come out pretty strong here over the past few weeks.

GREGORY FRANCORT: Yeah, and you've seen the stock react. Chipotle's stock has been strong over the last month or two. And I think some of that is a more bullish expectation in that group. Casual dining, as we looked at it, it's pretty tricky because if you look last year, this is the quarter where we lapped Omicron. And so January for casual dining sit-down businesses was up 17% growth, February was up 8%, and March was up 5%.

So you are seeing a slowdown. And some of that is just lapping a more open economy and a more open dining space. And that is going to be a pressure for the sit-down category on a relative basis to where we were a couple of months ago.

But I think as we look at it, we think quick service is a great place to play. We continue to like McDonald's a lot as a stock. And it's been very strong. But as we look at full-service specifically, we see Darden as having some advantages of scale.

BRAD SMITH: And in that scale, it also comes down to the real estate footprint that they operate. Do you believe that their real estate portfolio that Darden has for all of its restaurants is sustainable enough in order for them to be able to build off of that or at least have experienced growth with the existing footprint that they have? Or do you think that they're going to have to start quickly opening up even more franchise locations?

GREGORY FRANCORT: Yeah, look, look, Darden's laid out basically a path to 2% to 3% unit growth. It's not anything heroic, but it's a pretty steady, growing business. And what's sort of ironic about it is the biggest business, Olive Garden, gets the best returns, given the sales that they put out there, given the fact that the food cost on pasta is pretty low. And so we see continued whitespace for them to keep developing Olive Gardens and also the rest of the portfolio and hit that 2% to 3% unit growth on a go-forward basis.

BRIAN SOZZI: Greg, how amazing is it for a company like Darden that egg prices are starting to plunge here?

GREGORY FRANCORT: It's probably less relevant to Olive Garden and a little more relevant to some of their peers, like a First Watch or a Cracker Barrel. But it helps. I mean, this is a general theme where inflation is coming down. Darden has given an early guidance for next year's food costs to be low single digit. That's a lot better of an environment than 8%, 10%, 12% food inflation to just manage from a P&L perspective.

BRAD SMITH: OK, and so does that mean, then, for the other items that they are needing to take on just to operate their menu that they are seeing improvement there and that consumers are still kind of taking on whatever added costs at Olive Garden or Longhorn or any of the subsidiaries, are saying, yeah, you know what? We understand that to get the same type of quality, we're going to have to pay a little bit more.

GREGORY FRANCORT: Yeah, I think what you're seeing is you're seeing beef and steak start to be a little bit of an issue. But otherwise, across the menu, you've started to see a little bit less inflationary pressures. I think restaurants need consistency to operate. And one of the things we did not see last year was consistency in food inflation. It was extremely challenging environment in 2022 for restaurant companies.

BRIAN SOZZI: Greg, you briefly mentioned McDonald's. Investors really seem to like McDonald's here. They're having a moment. But my question, too, is why? They're selling the same food, they're just selling, what, really meal plan bags or based on pop stars? I mean, that's not reinventing the wheel.

GREGORY FRANCORT: Yeah, it is impressive what McDonald's did. And I used to work with a guy, Joe Buckley. And he covered the space in '03, '04, '05 when McDonald's really had their last kind of breakout and run. And just never underestimate McDonald's was his advice to me.

It's surprising. This is a company that's doing $50 billion in sales on an industry that's $800 or $900 billion. That's a massive market share. And they continue to post very strong comps. They're operating extremely well.

They've refreshed the entire store base the last five years. That matters to a consumer. When they want to walk in, they want to see a clean restaurant, a restaurant that's up to date. They don't want to see a tired location or real estate. That matters to the consumer.

BRAD SMITH: All right, Greg, I'm officially hungry now. I'm actually looking at the menu for Olive Garden at this point in time, the Times Square one, if you want to place an order.

BRIAN SOZZI: Order me lunch. You know where I sit.

BRAD SMITH: I'm looking at the Tour de Italy. The Tour de Italy's been on the-- it's been on the menu since I've been in elementary school, Greg.

BRIAN SOZZI: Shout out to my grandparents. There we go.

BRAD SMITH: Some menu innovation.

GREGORY FRANCORT: Did you guys go to Valentine's Day, Valentine's Day at Olive Garden? Did that happen?

BRIAN SOZZI: No, that did not happen. That's [INAUDIBLE].

BRAD SMITH: We didn't get invited. Nobody invited us, Greg.

BRIAN SOZZI: I know better.

BRAD SMITH: Yeah. Guggenheim Partners Director Gregory Francort joining us here today.