Darden's 'Back-to-Basics' Approach is Beating the Competition
There is nothing overly complicated about what Darden is doing these days. CEO Gene Lee even called it a “back-to-basics operating philosophy” Tuesday as he recapped the company’s bullish second-quarter performance. Yet that simplified approach, which began three years ago, has been key to Darden’s envious performance of late, especially as it compares to the rocky world that is casual dining.
In the second quarter, Darden’s total sales boomed 14.6 percent, year-over-year, to $1.88 billion. Overall same-store sales from its seven brands (not counting recently purchased Cheddar’s Scratch Kitchen) rose 3.1 percent. The sales beat Wall Street’s estimate of $1.85 billion. The company also raised its fiscal 2018 guidance to expect sales up to 13 percent, better than the 11.5–13 percent forecasted earlier. The news sent shares climbing nearly 7 percent to $96.69 at close Tuesday.
“Given our consistent positive results, I am more convinced than ever that our success has been driven by the strategy we implemented three years ago,” Lee said in a conference call. “Our intense focus on improving the food, service, and atmosphere in our restaurants, combined with relevant integrated marketing, remains the winning strategy for our brands.
BDO's latest edition of The Counter, an industry benchmarking update that collects data from publicly traded restaurant companies, showed that sales at casual and upscale casual restaurants fell 0.9 percent and 0.4 percent, respectively, across the board, in the past quarter. This included negative gains from some of the largest brands in the nation. DineEquity flagship Applebee's was down 7.7 percent and Brinker International's Chili's saw comps fall 3.4 percent, although a new menu did return some positive early signs.
One telling detail for Darden, which fits right into this strategy, regarded LongHorn Steakhouse and its shrinking menu. The brand watched same-store sales increase 3.8 percent in the quarter versus the prior-year period, marking the 19th consecutive quarter of same-store sales growth.
Lee said 500-unit LongHorn has reduced its menu by nearly 30 percent over the past couple of years. The change has led to higher level of execution, Lee said. It’s also allowed LongHorn to focus on quality, guest experience, and service.
LongHorn increased the size of its steaks and removed complexity in the kitchen. “LongHorn, historically, has been a high food cost, low labor cost operation. And we have simplified that operation to be able to bring the labor cost down and increase the productivity, while improving the overall quality of the food product,” Lee said. “And even as much as we've reduced it already, I think there's still further reduction to be done in the LongHorn menu to simplify the operation.”
Lee said Darden would continue fine-tuning LongHorn’s menu as it pulls back items.
“As we simplify our operation, we’re executing it at a higher level. We need to get the steaks cooked correctly, we need to get the food out faster, and that’s what simplification has done for us,” Lee said.
Darden enjoyed positive comps at six of its seven brands included in the overall numbers. Olive Garden motored along with 3 percent growth, giving the 849-unit chain its 13th straight quarter with positive comps. It outperformed casual-dining competitors by 400 basis points, Darden said.
The Capital Grille reported 3.8 percent same-store sales growth. Eddie V’s comps grew 6.8 percent; Yard House reported a 2 percent increase; and Bahama Breeze’s same-store sales were up 2.5 percent. Seasons 52 had a 0.5 percent decline.
This was a welcome change from a somewhat muted first quarter, where lower-than-expected results underwhelmed investors. As a whole, same-store sales grew 1.7 percent for Darden in the first quarter. Olive Garden was up 1.9 percent; LongHorn 2.6 percent; The Capital Grille 2 percent; Eddie V’s 2.5 percent; Yard House dropped 4 percent; and Seasons 52 declined 2.2 percent. Clearly, Darden’s improvement in the second quarter was a positive sign for the company, especially given the weather impact in 2017. Rick Cardenas, Darden’s chief financial officer, said hurricanes affected Darden by about 50 basis points in closed days, with each brand facing different challenges. It trimmed earnings per share about 2 cents instead of the 3 the company predicted. And it was slightly negative in comps instead of down 60 basis points.
In regards to Olive Garden’s continued success, Lee said the brand’s promotional strategies and core menu created everyday value and drove increased frequency. To-go performance grew 12 percent, which boosted sales. That growth was a major positive.
Lee said he expects it to continue gaining, and could one day be 20 percent of Olive Garden’s business. “[It’s] primarily because the type of food travels so well,” he said.
As it has in recent quarters, Cheddar’s lagged behind in sales. Darden purchased the brand for $780 million in April.
In the first quarter, Cheddar’s same-store sales were down 1.4 percent in its first review under Darden’s umbrella. They declined 2 percent in the second.
Lee said the negative comps, given how Darden is integrating the brand, should be expected. Past history would back that up. Lee said LongHorn’s only negative full year of same-store sales declines in its history came during a similar integration. It happened at Yard House, too.
The process involves integrating Cheddar’s two largest franchisees, which Darden recently acquired, as well as merging three different operating systems into the company’s network. Darden is converting point-of-sales systems in 10 restaurants per week, Lee said. This includes two weeks of training per restaurant prior to the conversion. The company also needs to fully transition Cheddar’s payroll system on the Darden platform. It recently completed open enrollment, meaning Cheddar’s employees will be transitioning to Darden benefits at the beginning of the calendar year. “Integration-related activity is peaking as we transition distribution networks, including our mainline distributor, produce suppliers and smallware suppliers,” Lee said. “… It is our intent to integrate Cheddar's and the two acquired franchise systems as fast as possible in order to position the brand to take advantage of the scale, synergies and other benefits of the Darden infrastructure. We realize that this is having a short-term negative impact on sales momentum. But we believe the long-term benefit will far outweigh the short-term impact.”
Lee said people shouldn’t get hung up on short-term quarter-to-quarter comps. Cheddar’s is averaging about 6,300 guests per week, per restaurant. He said the process could take another 6–12 months, but once completed, “will be a good growth driver for Darden.”
“We're just really impressed with the loyalty. We've been outdoing what we call dine-arounds, where our team goes out and dines with guests. And we're learning and we continue to learn more and more about the admiration they have for our brand,” Lee said.
Lee also touched on Darden's strong employee retention rates, which buck industry trends as well.
"We believe we have great training programs," he said. "Fifty percent of our management comes from our team member ranks. And so we believe we're offering growth opportunities to our team members. I think we're doing the right thing. ... We're doing a good job taking care of our guests. And when we take care of our guests, we win."
Darden's simplified approach is anchored by four key factors, Lee added.
"This back-to-basics operating philosophy is coupled with Darden's four competitive advantages," he said. "One, leveraging our significant scale to create a cost advantage; two, using extensive data and insights to improve operating fundamentals and to better understand our guest and communicate with them more effectively; ensuring our brands systematically go through our rigorous strategic planning process; and four, cultivating our results-oriented people culture to enable growth."