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Darden: Green Shoots for Casual and Fine Dining?

RJ Hottovy
Jun 23, 2023
Darden: Green Shoots for Casual and Fine Dining?

By virtue of being the largest full-service restaurant operator in the U.S. and reporting results on a different fiscal calendar than much of the rest of the restaurant industry, Darden (the parent company for Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, and several other restaurant brands) often serves as a barometer for the health of the full-service restaurant category (the company reported fiscal fourth quarter results for the three-month period ended May 2023 earlier this week).

Against a “tough macro environment”, it’s not surprising that visitation trends across the full-service restaurant category have declined year-over-year, with our data suggesting that visits for the category have fallen roughly 6.7% since the beginning of March (below). Darden (all concepts) has also seen its visitation trends decline on a year-over-year basis over the corresponding period but has exceeded overall category visit trends by roughly 3% (averaging a 3%-4% decline in visits since the beginning of March).

Why has Darden outperformed? It starts with its pricing strategies. Darden is not immune from the inflationary pressures impacting the industry (food costs obviously, but also labor and rent inflation as well), but the company has effectively wielded the scale advantages that come with being the largest player in the full-service restaurant category to underprice inflation. In other words, Darden purchases so much from its suppliers that it often receives better pricing than its peers, which in turn allows them to take a more measured approach to raising prices than the competition. These scale advantages–along with a ‘back-to-basics’ operating model adopted the past several years–have also helped to preserve profitability, as Darden is already on the short list of restaurant operators still posting restaurant-level EBITDA margin (restaurant sales less food, labor, operating, and marketing expenses) gains (restaurant-level EBITDA improved 80 basis points to 20.7% during the quarter). When the company does run promotions like Olive Garden’s $13.99 Never Ending Pasta pasta promotions, it’s not a steep discount (unlike the 2 for $20-$25 meal promotions that other operators tend to use to drive visits in a normal inflationary environment). These have also helped to drive improved visitation trends. (Placer’s blog team also recently looked at the performance of Olive Garden and LongHorn Steak on certain holidays and geographic markets, which contributed to this quarter’s success).

Taken as a whole, Darden’s quarterly update and outlook for fiscal 2024 suggest that a more value conscious consumer is likely to continue over the foreseeable future. For next year, the company forecast same-store sales growth of 2.5%-3.5%, which assumes pricing growth of approximately 3.5%-4.0% and traffic being flat to down -1.5%. This seems appropriate, but leaving room for upside if food away from home inflation continues to subside and the broader economic environment stabilizes. From a real estate development perspective, the company plans to open 50 gross new locations in the coming fiscal year–compared to the 47 net openings this year. This is slightly below previous expectations in the 55-unit range, but reflective of ongoing delays on the permitting and utilities front (althoug management did note that they are starting to see an uptick in multiple contractor bids for a new location). A quick search using Placer’s Development+ tool reveals that Darden’s new unit openings will be a healthy mix of its core (Olive Garden and LongHorn Steakhouse) and emergent brands (including a few Yard House openings).

One of the other key questions coming out of the quarter–which is relevant for restaurant and CRE executives–is the health of the fine dining segment. We’ve already covered why Darden might be interested in Ruth’s Chris–the acquisition has officially closed and the company will spend much of the coming year integrating the brand–but several headlines called out weakness in Darden’s fine dining segment (which includes The Capital Grille and Eddie V’s) due to the -1.9% decline in same-restaurant sales versus a 4.0% gain for Darden on a consolidated basis (including 4.4% growth at Olive Garden and 7.1% growth at LongHorn).

While we did see some visitation weakness from Darden’s fine dining segment during the quarter–The Capital Grille in particular–the company noted that the number of entrees sold per operating week continues to outpace pre-pandemic levels (implying that takeout orders have also increased for fine dining chains). It’s also worth noting that on a year-over-four-year basis (pre- versus post-pandemic), fine dining has held up better than the overall casual dining segment (below). As we pointed out last week, the casual dining category was one of the hardest hit categories with respect to permanent closures during the pandemic, with regional chains being hit particularly hard.

Darden CFO Rajesh Vennam further discussed some of the consumer behavior trends taking place at Darden’s fine dining restaurants this past quarter: “[W]e actually saw a fairly consistent retention related to pre-COVID for the last three quarters at Fine Dining. What we're seeing is a little bit of pullback on the alcohol sales. And we still think that's also a function of wrapping on a significant increase a year ago. Now as we just generally speaking, what we're seeing with the demographics is consumers below 35 or above pre-COVID, but they're below last year. And then whereas 55-plus is still below pre-COVID, but they're similar to last year. So there's a different dynamic year-over-year where you're seeing the younger demographic pull back a little bit year-over-year. And then -- and similarly, on the income side, we're seeing that lower income is above pre-COVID but still below last -- but below last year, whereas higher income is flattish to last year or similar to last year, but they are still below pre-COVID.” This is a trend we’ve observed with other higher-end restaurants and specialty retailers; namely, fewer visits from younger, less affluent customers that have begun to trade down to other channels. Despite some macro-related headwinds impacting younger and less affluent consumers, we believe the fine dining category remains firmly on solid ground. Trends have improved thus far in June–likely helped by favorable weather conditions as well as an uptick in new menu introductions–and, depending on inflation trends in the back half of the year, could continue to stabilize. We continue to see strong visitation trends as malls reallocate square footage to new and established fine dining concepts and believe the fine dining category is well positioned for future unit growth over the next several years.

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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