Darden Softens Unit Growth Targets as COVID Impact Persists Two years ago during a call with investors, former Darden CEO Gene Lee lamented how COVID delays were harming unit growth. He hoped the company would soon reach the higher end of its 2-3 percent expansion target.
While Rick Cardenas is now chief executive, the central problem remains the same. The remnants of the pandemic, especially when it comes to permitting and equipment, are still impacting development. Cardenas said the goal is still to reach closer to 3 percent unit growth, but he admitted that it will take Darden “a little bit more time” than the company originally thought.
“It would be great if we could get permits as fast as we used to get them. It would be great if we can get utilities turned on as fast as we used to get them,” Cardenas said during Darden’s Q4 earnings call. “That’s just not coming back anywhere near where we need it to be.”
In fiscal 2023, the company opened a net of 47 restaurants, which equated to roughly 2.5 percent unit growth. Olive Garden opened a net of 21 corporate units, pushing it to 905 locations. The brand leader was followed by LongHorn Steakhouse (562 stores), Cheddar’s Scratch Kitchen (180 stores), Yard House (86 stores), The Capital Grille (62 stores), Seasons 52 (44 stores), Bahama Breeze (42 stores), Eddie V’s (29 stores), and The Capital Burger (four stores). All chains achieved net growth except for The Capital Grille and Bahama Breeze, which didn’t change their unit count, and Seasons 52, which dropped by one location.
For fiscal 2024, Darden projects 50 gross openings, and it’s likely many of those are already underway. Cardenas said if a store hasn’t begun the process by the end of the first quarter, it probably won’t open before the end of the fiscal year. That’s the result of what COVID has done to development timelines.
“We want to be prudent in making sure that we are earning a return that we really want to earn in our restaurants,” Cardenas said. “And we’ve had some contractors starting to come back in and bid for sites that they stopped bidding for during the pandemic and even after the pandemic, which should make bidding more competitive. We’re starting to see that. And so we wanted to be prudent and make sure that we have the right returns and we still have great returns in all of our restaurants and that’s kind of where it is. It’s not really because of risks.”
Cardenas noted that Darden prefers to reach its 2-3 percent framework through just organic growth, but the range technically includes M&A. That’s particularly relevant for fiscal 2023 since the company spent $715 million to buy Ruth’s Chris Steak House. At the time of acquisition, the fine-dining concept had 154 locations systemwide, including 80 company-owned stores and 74 franchised restaurants. Going into 2024, sales and profits from Ruth’s corporate units will be included in Darden’s fine-dining segment, while revenue and profits from franchise stores will be in its “other” segment, which is how all of the company’s franchise locations are treated. But, the steakhouse’s same-store sales won’t be included until after 16 months.
Olive Garden, LongHorn, and the “other” segment (Cheddar’s, Yard House, and Bahama Breeze), saw comps rise 4.4 percent, 7.1 percent, and 2.2 percent, respectively in Q4. Each of these groups also saw segment profit increases on a quarterly and annual basis. Olive Garden achieved its highest sales day and week in history during the week of Mother’s Day, and LongHorn’s “steaks grilled correctly” score is at an all-time high. Olive Garden’s average weekly sales were 108,587 in Q4, or $5.6 million in AUV on an annualized basis. For LongHorn, it was $98,240, or $5.1 million in annualized AUV.
Meanwhile, fine dining saw decreases across the board, with comps lowering 1.9 percent, quarterly profit going from $44 million to $38.3 million, and annual profit moving from $165 million to $158.5 million.
Darden attributed fine-dining declines to lapping a resurgence in demand during last year’s fourth quarter. More softness is expected in the first quarter, but stabilization is expected afterward.
Overall, the company estimates 2.5-3.5 percent same-store sales growth and 3.5-4 percent pricing in fiscal 2024, which implies flat to negative 1.5 percent traffic growth. In terms of what that means for each segment specifically, Olive Garden should be in the middle of the comps range, and LongHorn is expected to be outside of it on the positive side because of steak inflation and higher pricing. Fine dining will likely be outside the range on the lower end.
To boost traffic in 2023, Olive Garden brought back its Never-Ending Pasta Bowl promotion. Cardenas said in December that it resulted in a “good jump four us” during the second quarter, which is Darden’s lowest-performing time of the year. The CEO told investors on the fourth-quarter call that Olive Garden will explore Never-Ending Pasta Bowl and see “if there’s anything we can do with it,” but chose not to give any further plans.
The casual-dining giant will continue to advertise, but through three filters the company has mentioned several times before—it must elevate brand equity, be simple to execute, and not be deep discounts. These three tenets are meant to grow core guests as opposed to customers who are temporarily drawn to special deals.
“We’ll react accordingly if something really changes,” Cardenas said. “But when we increase our marketing spend, if we do, we expect it to earn a return. So we don’t necessarily expect us to go back into the deep discount craze and that’s our strategy and we’re going to try to stick to it.”
Despite the 2024 forecast, Cardenas said guests are “pretty strong overall” and that Darden hasn’t seen material changes in the menu mix. The only area where the company is really seeing check management is in alcohol sales at the higher-end brands, and that’s a function of comparing against a significant increase last year.
“Food away from home is really difficult to give up if you’re executing,” Cardenas said. “And so what we think about it is, what it means to our brands. What it means to what we do every day. And we believe that operators that can deliver on their brand promise and the value that appeals to guests, despite economic challenges, is what’s going to get you to win. And that’s what we’ve been doing.” Source: fsr.