In a rare move, the Italian chain ran the promotion for seven weeks in the second quarter, leading to a 'good jump' in traffic and sales. It's likely to be the only LTO of fiscal 2023.
Darden CEO Rick Cardenas has repeatedly emphasized to investors that any promotional activity from Olive Garden had to meet three criteria—elevate brand equity, have simplicity, and no deep discount.
During the company's second quarter, the restaurant found the right fit, and it's an offer customers are all too familiar with—the Never-Ending Pasta Bowl special, which hadn't been on the menu in three years. The promotion met the first tenet because of its popularity and immediate association with Olive Garden, and it's easy to execute because existing menu items are involved and add-on choices are limited. In terms of avoiding deep discounting, the promotion—during its seven-week run—was priced at $13.99, which was $3 higher than the previous iteration.
Cardenas said the strength of Never-Ending Pasta Bowl created a bigger traffic gap between Olive Garden and the casual-dining industry. And that's with 75 percent of the media budget compared to prior years. Cardenas declined to share how much the promotion contributed to the quarter; he only noted it was "a good jump for us" during a Q2 that's historically the lowest-performing time of year. As the restaurant looks toward the rest of its fiscal 2023, guidance contemplates continued strength for Olive Garden, but likely not at the level it was with Never-Ending Pasta Bowl.
"Remember, this is an iconic, limited-time offer uniquely positioned, and it covers all three filters we mentioned," Cardenas said during the brand's Q2 earnings call. "It exceeded our expectations, and that's a pretty pleasant surprise for us given the higher price point and the lower media support. But it does speak to how iconic that brand offer is and the things that Olive Garden brings in such a compelling way. Finally, we haven't run it in three years, so guests were excited for the return."
The CEO said Never-Ending Pasta Bowl will likely be the only limited-time offer for the rest of the fiscal year, although he didn't rule anything out. He explained that Olive Garden wants traffic from its core guests, which is more sustainable than attracting customers coming in just for the promotional activity.
"For competitive reasons, we're not going to discuss any more promotional plan details," Cardenas said. "We're going to continue to use our filters that we mentioned—elevating brand equity by bringing the brand's competitive advantage to life. Second, simple to execute, and third, not at a deep discount. As you probably see on your TV today, we're currently airing out Oven-Baked Pastas, which are core menu items for us. So they're not a limited-time offer, and it includes our new Ravioli Carbonara. None of these items are discounted."
Thanks to the promotion, Olive Garden's same-store sales rose 7.6 percent in Q2 year-over-year, compared to a 2.3 percent rise in Q1 and a 6.5 percent lift in Q4. Average weekly sales per restaurant were $101,570, or $5.3 million in annualized AUV, versus $90,871 three years ago. Total sales came in at $1.18 billion, up from $1.08 billion last year.
Cardenas said Never-Ending Pasta Bowl will have a halo effect on the brand in the coming quarters. He doesn't expect everything to be as strong as it was when the promotion was active, but he did note that same-store sales in Q3 right now are inline with year-to-date comps, so there hasn't been a big slowdown after the promotion ended.
"That's the idea of marketing or messaging," Cardenas said. "It should endure longer than the limited-time offer. And we think this one did."
The brand saw its segment profit slip from $235.1 million in Q2 2022 to $218.9 million this year due to higher costs and pricing under inflation. Darden carried 6.5 percent pricing in the quarter, which is close to what Olive Garden had on its own. The company said increased menu prices haven't caused the customer to pull back. Higher-income customers are strong, as seen by Darden's fine-dining segment (Seasons 52, Eddie V's, and The Capital Grille) experiencing record highs on Thanksgiving. Guests that come from households under $50,000 have been softer in the past six months, but still above pre-COVID levels. Cardenas believes this is because most of Olive Garden's customers are single, retirees, or from multigenerational households, meaning that $50,000 may go further.
Additionally, the company hasn't seen check management from guests or any notable mix shift.
"We've got a very strategic way and methodical way we price, so that we don't get mix changes when we take price because we've learned that system over time, and it's a proprietary way we do it," Cardenas said. "We use it with our data scientists here. So we haven't seen a whole lot of mix shift, and the economy has seen a shift from goods to services. That could be why you haven't seen a whole lot of shift in mix in our business and maybe in our competitors' business."
Darden said its concepts are staffed well, but turnover is still elevated compared to pre-COVID comparisons. It's happening in the entry-level positions and more so in the back of house. However, management level staffing is at historical highs. As for food costs, Olive Garden saw commodity inflation exceed 20 percent, with chicken, dairy, wheat, and lettuce causing the most headaches.
"While we did not experience the same level of inflation as the general market, [lettuce] was a big surprise, CFO Raj Vennam said. "It was, I'll call it, a $4 million to $5 million impact on on the quarter. That's meaningful."
Olive Garden's sister concepts saw positive comps in Q2 as well. LongHorn Steakhouse's same-store sales rose 7.3 percent in the quarter, followed by fine dining (5.9 percent), and the other business segment (Cheddar's Scratch Kitchen, Bahama Breeze, Seasons 52, and Yard House). Each brand witnessed a jump in total sales and average weekly sales, but saw segment profit lower due to inflationary pressures. Most notably, fine dining's average weekly sales grew to $172,401 ($9 million annualized AUV), compared to $147,668 three years ago.
For all of fiscal 2023, Darden projects $10.3 billion to $10.45 billion in sales, which is up from its previous prediction of $10.2 billion to $10.4 billion. Same-store sales are expected to be 5-6.5 percent, a bump from 4 to 6 percent. The company said inflation should be 7 percent, up slightly from its previous guidance of 6 percent. The development outlook—55 to 60 new restaurants—remained the same.
Olive Garden finished Q2 with 890 restaurants. Behind that is LongHorn (553), Cheddar's (179), Yard House (85), The Capital Grille (61), Seasons 52 (45), Bahama Breeze (42), Eddie V's (29), and The Capital Burger (3).
Also, to note, Darden recently surpassed $10 billion in sales on a trailing 52-week basis for the first time in its history.