Olive Garden and Longhorn set total sales and weekly sales records in the third quarter, further widening their gap with the industry.
Throughout the pandemic, Darden has championed pricing below inflation. Consumers are responding by staying put, CEO Rick Cardenas said.
In the past three years, the company has underpriced inflation by more than 400 basis points and underpriced the full-service segment by more than 600 basis points. The gap may get even wider as the year goes on. Darden's prices were 6.5 percent higher year-over-year in Q2 and 6.3 percent larger in Q3. In the fourth quarter, pricing is expected to be under 6 percent.
"The peak pricing for us on an annual basis is behind us," CFO Raj Vennam said during Darden's Q3 earnings call. "Unless something dramatically changes, we see pricing coming down. ... when you look at what's happening in the market, I think most people are on an upward trend on pricing. We think we're actually from here on a downward trend."
The strategy fueled unprecedented numbers in Q3. Olive Garden and LongHorn Steakhouse set weekly sales records more than once, the highest coming during the week of Valentine's Day. For the quarter, Olive Garden earned $112,384 in average weekly sales per store ($5.84 million in annualized AUV), well above its $103,998 average in 2020. For LongHorn, it was $96,905 ($5.01 million in annualized AUV), a big increase from $76,101 in 2020.
Also, all brands achieved record total sales in the third quarter: Olive Garden, $3.61 billion; LongHorn, $1.9 billion; fine dining segment (The Capital Grille, Seasons 52, and Eddie V's), $621 million; and other business segment (Cheddar's Scratch Kitchen, Yard House, and Bahama Breeze), $1.56 billion.
Darden's consolidated same-store sales increased 11.7 percent in Q3. That breaks down to Olive Garden, 12.3 percent; Longhorn, 10.8 percent; fine dining, 11.7 percent; other business segment, 11.7 percent.
Since August 2022, overall year-over-year visits to Darden restaurants trended above the industry overall in nearly every month, according to Placer.ai data. January and February visits were up up 10.1 percent and 2 percent, respectively.
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Data from Darden's proprietary brand health tracker suggests most customers aren't pulling back from restaurant visits and many aren't trading down into quick service. That's not only due to lower prices, but also because of improved customer service. Darden's restaurants continue to be well-staffed and manager staffing is at historic highs.
"Consumers continue to seek value, which is not about low prices. Consumers are making spending trade-offs. And food away from home is one of the most difficult expenses to give up because going out to a restaurant is still an affordable luxury for them," Cardenas said. "And so, what does that mean for us? For our brands, we believe that operators that can deliver on their brand promise and value will continue to appeal to consumers, despite economic challenges. And that's what we remain focused on doing, no matter what happens in the industry and whatever happens to the category."
Olive Garden's 22.5 percent profit margin was 150 basis points better than last year, and LongHorn's 17.4 percent margin was 80 basis points higher. The other business segment's profit margin was 14 percent, or 20 percent higher year-over-year, but fine dining's 21.8 percent profit margin was 110 basis points lower due to commodity inflation.
Operating income has grown 70 basis points since pre-COVID despite underpricing inflation. This is partially due to a reduction in marketing expenses. Cardenas didn't share much detail on future promotional plans, but he noted that marketing spend isn't going to be significantly different year-over-year. He also emphasized that if and when Darden increases its marketing spend, a positive ROI is expected.
Meanwhile, Chili's made its return to TV recently, boasting its revamped "3 for Me" value platform. Cardenas said advertising will always be part of Olive Garden because of its scale, but promotions will be about longstanding offers, not deep discounted deals.
"I can tell you that there's a big competitor that just went back on TV and they talked about it before. They did it," the CEO said. "And you've got some of these other competitors that are out there a little bit more on television than they were before. That said, Olive Garden still is usually in the top two or three of advertising spend in our space, and we're doing that through branded kind of advertising versus deals."
For the past several years, Darden has committed to stopping deep discounting. The closest it came to a promotional deal was the return of the Never-Ending Pasta Bowl, which hadn't been on the menu in three years. However, during its seven-week run, the item was priced at $13.99, $3 higher than the previous rollout.
The stance hurts traffic, but Cardenas pointed out that if food costs lower by 1 percent, that's enough to offset a 2 percent drop in traffic. Meaning, if commodities and inflation decrease, Darden can weather traffic declines and reach the same EBITDA without doing anything.
"The industry has to think long-term about how they drive traffic through discounting," Cardenas said. "And we have made that shift. We made that shift—even started it before COVID—to drive traffic through better experiences, better overall value, and not discounting to a very small portion of our guest base."
Darden's mix of lower-income consumers has softened in the past few quarters, but it's still above pre-COVID. Cardenas noted that guests typically manage how much they spend at the restaurant before they start limiting their visits. So far, the company hasn't seen much check management, which tells Darden that even though consumer sentiment was bad in 2022, customers still wanted to spend.
"We may see it. And when we do, it will start at check probably and then it will probably more likely impact our lower-end consumer brands," Cardenas said. "Not that they're lower-end brands, they just have a bigger mix of lower-end consumers, and it will impact less our high-end brands. But that's the benefit of a portfolio and the portfolio that we have—that we can withstand shocks to one segment of the population."
For fiscal 2023, Darden is projecting total sales of $10.45 billion to $10.5 billion, same-store sales growth of 6.5 percent to 7 percent, 55 restaurant openings, capital spending of $550 million to $575 million, and inflation of 7 percent to 7.5 percent.
Darden had 1,890 restaurants in its portfolio at the end of Q3: Olive Garden, 893; LongHorn, 554; Cheddars, 179; Yard House, 86; The Capital Grille, 61; Seasons 52, 43; Bahama Breeze, 42; Eddie V's, 29; The Capital Burger, 3.