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Darden: Visitation Share Gains and Brand Diversification Nullify Lower-Income Consumer Concerns

RJ Hottovy
Sep 23, 2022
Darden: Visitation Share Gains and Brand Diversification Nullify Lower-Income Consumer Concerns

Key Darden Metrics

Much of the focus coming out of Darden’s fiscal 1Q23 update (the three months ended August 2022) centered on management’s commentary about inflation being a headwind for its customers, particularly those making $50,000 per year. While food inflation will likely weigh on discretionary spending power for lower-income consumers over the foreseeable future, we believe CRE executives and other industry professionals should evaluate the company with a more holistic view. When looking at Darden’s full portfolio, we see a collection of brands that continues to take visitation share from the full-service category as a whole (below) and offers visitor (and household income) diversification opportunities as its more nascent brands accelerate their unit growth plans.

  • Darden’s portfolio is outperforming its benchmarks. For 1Q23, Darden reported a sales increase of 6.1% driven by 4.2% same-restaurant sales growth and the addition of 34 net new restaurants. Management noted that prices had increased 6.5% during the quarter, though still almost 300 basis points below food away from inflation of 9.5% and helping to accentuate the value proposition for brands like Cheddar’s and Olive Garden. With prices up 6.5% for the quarter, it implies that transaction growth declined by a low-single-digit clip (also adjusting for menu mix/orders per transaction), which aligns with Placer.ai data. By month, same-restaurant sales were in the mid-3% range for June. the low 1% range for July, and approximately 8% in August (which is consistent with our visitation data when adjusting for pricing). More important from a CRE perspective, the consolidated company outperformed Placer.ai's index of full-service restaurants for five of the past six months.

  • Inflation headwinds for Darden’s lower-income consumers, but brand diversification will help in the future. As we’ve heard from other retailers and restaurant companies, inflation remains a headwind for households making less than $50,000 a year. According to management, Olive Garden and Cheddar's have more direct exposure to these guests, but it is seeing softness among these customers across the entire portfolio (although the recent retrenchment in gas prices has helped). To put context behind Darden’s potential exposure to households with less than $50K in income. It’s not exactly groundbreaking that Darden’s fine dining brands (The Capital Grille and Eddie V’s) have trade areas with a higher percentage of higher-income households. However, Yard House and Seasons 52 (representing 130 total locations) also have trade areas that skew toward higher-end audiences.  These emerging brands aren’t large enough to insulate the company from softness from lower-income consumers over the near-term (although management also noted that it expects inflation to moderate throughout the remainder of the year), but it does change the potential financial health of the full company as they continue to grow. During the quarter, the company opened nine new restaurants, and remains on track to open 55 to 60 new restaurants this fiscal year.

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RJ Hottovy

Head of Analytical Research, Placer.ai

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 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 an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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