Darden’s total sales lifted 13.3 percent to $2.13 billion in the third quarter, offering another positive chapter in what’s been a robust fiscal 2018 to date. But the report also arrived with Olive Garden news that will dismay some customers, and could have an adverse traffic effect in Q4 for the company, at least in the short term.
As Darden cuts back on its promotional cadence for the 853-unit brand, it plans to shift from nine to six deals per year. And one of those being cut: the popular Buy One, Take One promotion where guests purchase an entrée and get to take another one home for free—essentially offering two dinners for as low as $13.
Darden CEO Gene Lee said in a conference call Thursday morning that industry data showed that Olive Garden’s saw the largest improvement in value ratings versus key competitors over the last year, and “our focus on everyday value and simplification has also allowed us to reduce the number of promotional offers we will run this year.”
This includes a new advertising campaign, launched in Q3, intended to build awareness around the chain’s lunch duos starting at $6.99, dinner duos starting at $8.99, and create your pastas starting at $9.99.
“Our focus on simplification, like reducing the number of new items needed to support our promotional offers, is driving more consistency, and leading to higher levels of execution in our restaurants.” — Gene Lee, Darden CEO
Lee said the decision to cut the Buy One, Take One deal this year was done with the future in mind.
“To ensure it’s long-term effectiveness, we do not want to risk overexposure,” Lee said. “However, not running this promotion may have a short-term impact on our traffic in Q4.” That hints at a possible eventual return for the promotion.
Lee added that Darden isn’t sure exactly how it plans to offset the promotion in fiscal 2018. Yet, it did take into account the expected negative headwinds in its guidance. Darden slightly raised its full-year earnings per share target to $4.75 to $4.80 from $4.70–$4.78. It’s up 3.5 cents at the midpoint, and the company beat Q3 views by 7 cents, which could imply a lowering of guidance for the current Q4.
Darden also said it expects total sales growth of about 13 percent for the year, same-store sales of 2 percent, and about 40 new restaurant openings.
As for how Darden performed in Q3, the company beat Wall Street estimates on EPS but missed on revenue and same-store sales, sending shares down about 4 percent in early trading Thursday.
Darden’s blended same-store sales from legacy brands (not including Cheddar’s Scratch Kitchen) increased 2 percent versus the prior-year period. This included a 2.2 percent boost at Olive Garden; 2 percent increase at LongHorn Steakhouse; 2.8 percent at The Capital Grille; 2.7 percent at Eddie V’s; 1.9 percent at Yard House; 2 percent at Bahama Breeze; and negative 2 percent at Seasons 52. Cheddar’s, which Darden agreed to purchase for $780 million last March and completed the sale in late April, saw its comps fall 2.2 percent. Predictions from Consensus Metrix called for 2.4 percent, including 2.8 percent at Olive Garden and 3.1 percent at LongHorn.
Darden posted adjusted net earnings per share of $1.71, up 29.5 percent, which beat Wall Street estimates of $1.64. But the revenue number of $2.128 billion came in slightly under the predicted $2.152 billion mark.
Returning to Olive Garden, Lee said December was the highest total sales month in the history of the brand. The positive comps gave Olive Garden 14 consecutive quarters of growth, outperforming the industry benchmarks (excluding Darden) by 310 basis points. Same-store guest counts topped industry benchmarks by 440 basis points.
During the quarter, Dan Kiernan was also promoted to president of Olive Garden after Dave George assumed a new role as chief operating officer and executive vice president of the company.
Lee said Olive Garden “would continue to focus on simplification to improve execution of our standards.” The chain drove frequency through new menu items, including the Loaded Pasta Chips appetizer and the lunch entrée Meatball Pizza Bowl. Both were supported with integrated marketing campaigns.
Olive Garden’s off-premise business was a boon yet again. In the quarter, off-premise sales grew 13 percent and were about 15 percent of total sales for the quarter.
Despite some slowdown in comps growth, Lee said Olive Garden is well positioned for future success.
“We appear to have a lot less price in our menu compared to our competitors, which we think is a really great thing and will play out in the long term,” he said.
For LongHorn, the 2 percent growth gave the chain its 20th consecutive quarter of positive gains, outperforming industry benchmarks by 290 basis points. Guest counts outperformed by 420 basis points.
“The team at LongHorn continues to make solid progress against their long-term strategy of investing in the quality of the guest experience, simplifying operations to drive execution, and leveraging LongHorn’s unique culture to increase member engagement,” Lee said.
Lee said the primary focus at LongHorn has been on increasing food quality, and those efforts are paying off. He said Darden increased the size or improved the cut of nearly every one of its steaks in the past two years. In the last quarter, Lee said 499-unit LongHorn reduced its menu by nearly 30 percent over the past couple of years.
“Our focus on simplification, like reducing the number of new items needed to support our promotional offers, is driving more consistency, and leading to higher levels of execution in our restaurants. That’s evidenced by the fact that LongHorn ranks at top of its competitive set on food-quality scores,” he added.
LongHorn also kicked off its third-annual steak masters competition in the quarter. This program provides training, while creating excitement and increasing engagement in each restaurant, Lee said.
Cheddar’s continues to be a work in progress for Darden. In the first quarter, Cheddar’s same-store sales were down 1.4 percent in its first review under Darden’s umbrella. They declined 2 percent in the second before falling 2.2 percent in Q3.
Lee said the decline was driven by the 52 restaurants and two franchise systems that have been acquired over the last 14 months.
Same-store sales at the 91 legacy Cheddar’s units were essentially flat.
“Operations leadership is focused on strengthening the restaurant management team and working to improve operational excellence with a concentration on these previously franchised locations. Cheddar’s is a strong brand that serves 6,000 guests per week,” he said.
These high guests counts have created some challenges for Darden, which Lee said the company would address primarily through simplification.
In less than a year, the integration team has progressed to the final stages of the process, Lee said, with all restaurants using the full distribution network. The company also successful transitioned Cheddar’s onto the Darden payroll platform in December. The last major milestone will be the rollout of its proprietary point-of-sale system. Lee said the company expects that to take place by the end of fiscal 2018.
“Our restaurant managers and teams are still familiarizing themselves with our systems and processes. And it will take time before they are fully comfortable using them,” Lee said. “But we are pleased with the feedback we are receiving from the restaurants that are fully integrated into the Darden infrastructure.”
“As I’ve said previously, this is a complicated process,” he added. “We know we’re throwing a lot at the restaurant teams and we know it’s distracting. But we’re confident the long-term benefit will be worth the short-term impact this is having on the business.”
Lee also briefly spoke about Darden’s recently opened concept, The Capital Burger. The Washington, D.C., unit is a spinoff of The Capital Grille.
“The Capital Burger is a way for more of our guests to enjoy a bar-centric Capital Grille with a limited menu featuring our signature burgers. The Capital Burger leverages The Capital Grille’s steak and wine expertise, as well as their exceptional service, to create an extraordinary burger experience. I’m excited to see how our guests in that market respond,” he said.