We want to generalize because it's easier than doing the homework. We want to use the macro figures because they are spoonfed. We want to impute vast aspects of human behavior to politically charged issues like tax cuts.
But sometimes it all comes down to better pasta.
All last week we heard about sweeping concepts that should impact aggregates, but I find it much more simple -- and more accurate -- to examine the largest of our companies and make sense from what they say. If they say business is good because of lower taxes, then fine. If they say it's bad because of the weather -- and they have a good track record of not playing a blame game -- then I will take it.
So I was genuinely surprised, when reading the conference call of Darden Restaurants' (DRI) stellar quarter, that a Chicken Alfredo dish with 50% more chicken -- not a tax cut -- helped boost same-store sales growth to a 4.3% level. That is not bad for the owner of Olive Garden and an assorted mix of other restaurants.
I like Darden because it blankets the nation with 2,100 restaurants in all 50 states -- and CEO Gene Lee has a great grasp of industry fundamentals. He pointed out the augmented Chicken Alfredo as something that brought people in, not any change in tax policy. "I'm not really worried about year-over-year changes based on whether there is a little bit more tax money... with the consumer where they are feeling strong." In other words, the endless linking of federal policy to the consumer may be more of a thin reed than we think. Lee thinks things could only get better: "Wages are growing across all different part of the population," which he says will only produce better returns for 2019.
Not only that, but the endless worries about labor inflation with wages going up about 4%? Darden, like the 2200-store Chipotle Mexican Grill (CMG) , saw labor as a percentage of costs go DOWN year over year. That's more indicative of the boots on the ground story than anything the labor department tells us.
Digitization and simplified methods of operation drove the reduction. Both chains also cited lower turnover as a reason for lower labor costs. Remember, when you have turnover you have to train new people who are less efficient and more costly. The better run you are, the fewer hiring mistakes you have, the more loyalty you receive, and the higher the profits you generate, something which has always been the key to Costco's (COST) profitability.
All of this matters to me because when I see the futures down off of Japanese selling or declines in Europe, I have to remind myself that we have a robust U.S. economy that is nowhere near recession -- or you would certainly hear it from Darden, or Chipotle for that matter. We would have heard it from Walmart (WMT) , Costco, and Target (TGT) , too. We didn't.
Now all of this positive information will only be put into a rearguard calculus, where all stocks go down off of S&P sell programs, because that's how people invest. Then you can separate the stocks from the bushel and buy the ones that shouldn't be going down but are just caught in the tsunami. Both Darden and Chipotle are two of them. Managements are creating value that is not obliterated by endless political intrigue -- good luck if you thought the Mueller report ended it -- or Brexit, or even the coming onslaught of supply from the humongous slate of IPOs.
Just remember that, and the never ending bowl of pasta, and maybe when the selling clears, your portfolio will be all the more tasty and profitable.
