Darden reported that industry same-restaurant sales increased +0.9% and industry same-restaurant guest counts decreased -4.2% during its fiscal 1Q24. The chain’s comps outperformed the industry by +4.1% and its traffic outperformed by +4.3% (= flattish traffic for Darden during the quarter).
Macro/Consumer
- Wage growth has been higher for the lower income demo & while inflation impacts this demo more, their wages have grown faster than inflation over time.
- All-the-same, Darden experienced softness from consumers with household incomes of $125k+ as they increased their spend on luxury & international travel as opposed to fine dining.
- Notably, the company posited that $125k+ consumers may have decided to pay off their student loans to avoid higher interest rate payments driven by Fed hikes.
- Darden is focused on restoring demand from 65+ y/o consumers who were badly spooked by covid & the company reported a big increase in younger consumers.
- Geographic strength was reported in New England & the Northeast with softness in California, Texas & Florida.
- The addition of international airline routes could explain the softness in Florida & California given a possible tourism decline in these markets.
- While the impact of California’s FAST Act should extend beyond fast food (by driving higher wages across other restaurant segments), Darden is well positioned with a national average wage of $22/hr. including tips.
Sales
- A fiscal 1Q24 sales increase of +11.6% y/y was driven by the addition of 77 company-owned Ruth’s Chris Steakhouse restaurants, the addition of 46 net Darden legacy restaurants & +5% y/y comp growth.
- The quarterly same-store-sales decline in fine dining reflected a difficult y/y comparison given last year’s resurgence for dine-in demand that drove traffic to 107% of pre-covid levels.
- Darden’s strategy is to: keep overall pricing below inflation; avoiding deep discounting; & run better restaurants.
Margins
- While commodity costs are easing, net food inflation persists & labor inflation remains elevated (up +6% y/y during the quarter). Notably, the supply of beef (22% of basket) is down mid-single digits.
- Sales growth, along with labor productivity & higher overall pricing relative to inflation, drove a +2.3% y/y segment profit margin increase at both Olive Garden & LongHorn.
- Restaurant-level EBITDA was 19% during the quarter, +170 bps y/y.
- Elevated SG&A during the quarter reflected that bottom-line outperformance drove higher incentive comp.
