Can Darden Work its Magic with Cheddar's?
Darden’s “brilliant with the basics” operating strategy has been the anchor for its industry-fronting results for years now, and the fourth quarter was no different. Same-store sales increased at every brand except its most recent acquisition, Cheddar’s Scratch Kitchen, resulting in a blended lift of 2.2 percent across the legacy board. Earnings per share of $1.39 topped FactSet expectations of $1.35 and revenue came in at $2.13 billion. These stellar results sent Darden’s stock soaring more than 11 percent in pre-market trading Thursday morning.
But now the question becomes, can Darden inject its strategic, simplification-first philosophy into Cheddar’s, a 165-unit brand it purchased for $780 million last April?
The first quarter of fiscal 2019 will mark the first time Darden counts Cheddar’s in its comps base, which dragged guidance a bit to 1–2 percent expected growth. Cheddar’s same-store sales significantly underperformed Darden’s system in Q4 at negative 4.7 percent (original company stores were down 3.3 percent while the acquired franchise units fell 7 percent). For fiscal 2018, Cheddar’s dropped 2 percent, year-over-year.
Darden is 14 months into its integration process of Cheddar’s—a very early stage given all the changes at hand.
CEO Gene Lee said the Cheddar’s units Darden operates today were fragmented into three different businesses a year ago. Each had different systems, policies, and pricing structures.
Lee adds that integration activity peaked in Q4 as Cheddar’s transitioned to Darden’s proprietary point-of-sale system.
“As we’ve pushed the integration process to completion it became apparent that the team was losing focus on the basic operating fundamentals,” Lee said in a June 21 conference call. “Therefore, we decided to suspend marketing and promotional activities. We believe this was the correct decision even though we were rolling over a heavy period of promotional activities last year prior to and immediately after we closed the acquisition.”
Lee said, with the integration complete, Darden can now turn its focus toward rebuilding Cheddar’s operational foundation. This breaks down in three priorities.
Staff the restaurants: Lee said many of the units could use additional management and team member staffing, and better scheduling.
Master the new tools: Cheddar’s needs to learn how to use the fresh tools offered by the integration to improve operational effectiveness. “As with past acquisitions, this will take time,” Lee said.
Simplify: Cheddar’s is a complex operation that must be simplified to improve execution. This mirrors the same path Darden took with Olive Garden and LongHorn in the past, trimming the menu some 30 percent at the latter concept in an effort to improve kitchen effectiveness and overall guest satisfaction. “The team is making process quickly,” Lee said. “But we need to test the exchange to make sure we get the desired outcome.”
Darden also recently positioned LongHorn executive vice president of operations Paul Livrieri, who witnessed firsthand the steakhouse chain’s integration into Darden, to lead Cheddar’s operational team.
Cheddar’s average restaurant serves more than 6,000 guests per week. Lee expressed confidence in the long-term benefit it would bring to the bottom line, but admitted Cheddar’s would weigh down upcoming financial reports.
“We’re doing over $100 million in sales in Olive Garden in Orlando, Florida, and we’re doing close to $22–$23 million in Cheddar’s,” Lee said. “So the opportunity is for us to be able to do a lot more volume there, which is going to put pressure on the headline number in these markets that we’re growing out,” Lee said. “So we think long-term the real focus on Cheddar’s for us is going to be how do we grow top-line sales by adding units and maintaining a relatively healthy comp number. But we can’t add 15 units to the Orlando market and expect comps to be solid. But we think by having a bigger relative share we will increase the overall profitability of the overall business.”
He didn’t want to put a timetable on the process to reignite Cheddar’s. Lee said the challenges are “significant,” especially with the acquired franchise units. There were 25 franchised units at the time Darden announced its acquisition of Cheddar’s, and the company had to integrate the chain’s two largest franchisees. Darden weakened the base restaurants in doing so, Lee said, by pulling resources from those units to help staff the acquired ones.
“We just need to make sure we can help them get those basics, and we’re going to start with staffing,” he said.
Turnovers rates are too high for Darden’s liking, and units aren’t fully staffed. Before they can make meaningful improvement in the guest experience, Lee said, Darden needs to make measurable improvement in the team member experience.
“We expect Cheddar’s to be a little bit of a drag to our other brands, and have an impact, and that’s why we’re down in that 1–2 percent [comps prediction]. At this point in time, we believe we have the recipe, no pun intended, to really improve the operations in the Cheddar’s system and drive same-restaurant sales. But we all know that trying to drive same-restaurant sales to operational improvements takes more time than coming up with an advertising promotion or advertising gimmick to drive sales. We want to build a foundation that can move this business forward and make it sustainable for long-term. That’s our plan and we’re going to stick to it.”
As for Darden’s flagship, Olive Garden, it was another strong quarter. Same-store sales boosted 2.4 percent and total sales were up 4 percent. This marked the 15th consecutive quarter of growth, outperforming the industry benchmarks (excluding Darden) by 190 basis points. Same-store guest counts were 270 basis points better than the industry. Olive Garden’s total sales increased 3.7 percent to $4.1 billion for fiscal 2017.
“Olive Garden’s momentum is a result of our strategy to drive frequency among our core guests,” Lee said.
The brand’s decision to scale back promotions from nine to six in fiscal 2018, including removing the Buy One, Take One Deal, didn’t hurt comps, either.
“We have made the choice to invest some dollars into brank marketing away from promotional activity, where we believe will enhance the brand overall but is not as effective as your pure promotional advertising. And we think we saw some of that benefit in the quarter. The investments we’ve been making in the value platforms and advertising that.”
“We believe that simplifying our promotional construct allows us to execute at a much higher level at the restaurant level,” Lee added. “We believe it takes some cost out of the overall system from a training standpoint, from a supply chain standpoint. It was our belief that we as restaurateurs sometimes get bored with our own messaging faster than the consumer does when you look at the frequency of our consumer. So we believe this was a really important move in our simplification effort and we believe it had no impact on our overall same-restaurant sales for the year or for the quarter.”
LongHorn, which Lee said would be headed to California in the next 24 months, reported same-store sales of 2.4 percent in the quarter, and 2.7 percent for the year.
The Capital Grille lifted 2.6 percent in Q4; Eddie V’s 3.5 percent; Yard House 1.4 percent; Seasons 52 0.4 percent; and Bahama Breeze 0.6 percent.