Darden, Olive Garden Continue to Demolish Expectations
Behind the sales metrics and calculations driving Darden forward is a much simpler story. During a conference call Tuesday, CEO Gene Lee recalled the landscape three years prior. LongHorn Steakhouse and Olive Garden were standing at the terminal with suitcases full of luggage and zero chance of fitting them in the overhead bin.
“Don’t underestimate how simplifying our business has helped us improve execution,” Lee said. “… Where they were three years ago operationally to where we are today, these businesses are much simpler, on a trajectory to get even simpler. And we believe that’s the key to our guest count growth: Better execution through simplicity.”
Investors gobbled up the outlook, which came as Darden’s fourth-quarter earnings breezed past Wall Street expectations. Shares gained 2.3 percent Tuesday in premarket trading and hit an all-time high of $95.22 as they climbed more than 5 percent following comps that showed a 3.3 percent rise, year-over-year, in same-store sales for restaurants open at least a year, easily exceeding analyst predictions of 2.4 percent. Earnings per share were $1.18, better than Thomson Reuters’ $1.15 mark, and revenue grew 8.1 percent to $1.935 billion, eclipsing Thomson Reuters’ $1.865 billion estimate.
This simpler is better theme, weaved throughout the call, speaks to Darden’s renewed focus on food, service, and atmosphere. Again, Lee says this equation is meant to be easily digested, both by the company’s extensive system and, most importantly, by its guests.
“The momentum we are experiencing is a result of our back-to-basics operating philosophy,” Lee says. “Our focus on food, service, and atmosphere drives our simplification efforts. These efforts continue to enable us to improve execution in our restaurants and strengthen team member engagement. As evidenced by our industry leading retention rates.”
Darden plans to grow as well. The company expects to add 35—40 net restaurants in fiscal 2018 and grow sales from 11.5—13 percent.
As it has for 11 consecutive quarters, Olive Garden remained a benchmark for casual dining success in the industry. The brand reported another period of growth with same-store sales increasing 4.4 percent in the quarter and 2.6 percent for the entire year. They were up an impressive 4.9 percent in March and 4.4 percent in May. When you consider that same-store sales declined 1.1 percent across all chain restaurants in May, and casual dining as a whole fell 1 percent, Darden’s performance is eye-popping for competitors.
One factor at play is the brand’s to-go service, which has long been a staple for consumers. Meanwhile, other casual dining brands are playing catch-up. This is something Lee sees no sign of tapering off.
To-go grew 16 percent in the quarter, Lee said, which brings it to a three-year comp of around 58 percent. To-go is accounting for roughly 12.5 percent of sales.
“The consumer is still demanding convenience,” Lee said. “If you step back and say, ‘Where did we make the strategic choice?’ It was three to four years ago we said we’re going to bet on the consumer wanting more convenience in their dining experiences and we built a strategy to go after that. I don’t believe that the consumer is going to back off at all. The consumer is going to continue to demand that from us and we’re going to continue to meet that demand and I foresee growth continuing.”
While Lee said Olive Garden is still testing third-party delivery through a few different vendors, he believes the chain’s focus should remain on its core business.
“We think the upside is still in our catering and large-party delivery. We believe we have a product that is differentiated compared to our competitive set and we think there’s some big upside growth there,” he said.
LongHorn’s sales weren’t exactly lacking, either. The steakhouse chain reported growth of 3.5 percent in the fourth quarter and 1.2 percent for the year (its 17th consecutive quarter of growth). May was its best month in the quarter with a 4.6 percent boost. Additionally, traffic—another statistic lagging across the casual dining lexicon—was up 2 and 2.1 percent at the brands, respectively, in the fourth quarter. In May, traffic sagged 3 percent across the entire industry.
“We are seeing the brand’s long-term strategy begin to pay off,” Lee said. “The team continues to focus on improving the quality of the guest experience by investing in food quality and service execution, simplifying serving operations, and leveraging our unique culture to increase team member engagement. … Our guest feedback has never been better.”
The future of the bottom line could be even brighter for Darden as Cheddar’s Scratch Kitchen enters the conversation. The company completed the $780 million purchase in April and is expecting the brand to buoy company financials even higher. Lee said same-store sales were up 1.3 percent in the five weeks since Darden closed the deal.
“Cheddar’s has broad guest appeal and is ranked No. 1 in value in casual dining. In addition to being No. 1 in value, Cheddar’s also ranks first in both food and beverage and atmosphere ratings, leading to the highest intent to return and intent to recommend ratings in casual dining,” said chief financial officer Rick Cardenas in the call. “Cheddar’s is a strong performer with same-restaurant sales for full 2017 Darden’s fiscal calendar of positive .3 percent, outperforming the industry by over 300 basis points. … With over $600 million sales, $70 million in EBITDA, and given their current footprint, Cheddar’s will make a significant contribution to Darden’s growth.”
Darden’s portfolio also includes Eddie V’s (3.3 percent same-store sales growth in the fourth quarter), The Capital Grille (0.5 percent), Yard House (0.1 percent), Bahama Breeze (1.4 percent), and Seasons 52 (1.3 percent decrease).