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Darden Restaurants Talks Market Share Gains, Menu Upgrades, and Surging Wage Expenses

By Demitri Kalogeropoulos – Sep 26, 2018 at 5:00AM

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Here are the highlights from the casual dining chain's latest earnings call with investors.

Darden Restaurants' (DRI 1.16%) latest earnings report was music to many investors' ears. The chain announced accelerating sales growth to kick off its fiscal 2019 while also boosting its outlook on both the top and bottom lines.

The results extended a long streak of modest growth for both of its core franchises, Olive Garden and LongHorn Steakhouse. But executives expect these gains to speed up, and produce better earnings, as the chain continues soaking up market share in the quarters and years to come.

CEO Gene Lee and his team explained the rationale behind that improving outlook in a conference call with Wall Street analysts. Below are a few highlights from that discussion.

Inside a busy restaurant kitchen.

Image source: Getty Images.

Olive Garden wins

Olive Garden significantly outperformed the industry benchmarks across [sales] metrics. This strong performance is a result of four years of consistently improving the value proposition at Olive Garden. -- Lee

Olive Garden is Darden's single biggest brand, so its results factored heavily in the company's overall 6.5% sales increase for the quarter -- compared to an estimated 1% uptick in the broader industry. The Italian restaurant chain enjoyed healthy gains across the board, with customer traffic rising 1.5% even as pricing improved by 1.9%. The company also launched a few popular premium entrees that helped motivate customers to spend more during their meals. Overall, comparable-store sales leapt 6.3% to reflect solid market share gains. 

In addition to the menu changes, management credited a range of initiatives for contributing to this quarter's growth, including effective marketing and promotions, high-quality dining service, and a booming delivery and takeaway offering that today represents 13% of sales. These improvements are lifting customer satisfaction scores to new highs at Olive Garden, and that success is translating directly into faster growth. "Our strategy is working," Lee summarized.

LongHorn Steakhouse

LongHorn's focus on their long-term strategy continues to enable profitable sales growth while they further invest in the guest experience. -- Lee

LongHorn's results weren't quite as impressive, but they still translated into market share gains this quarter. Pricing and average spending both rose and allowed comps to improve by 3.1% overall. Customer traffic dipped into negative territory, yet management was fine with that result since it was driven by a reduced reliance on price cuts.

The LongHorn chain is hoping to continue lifting its customer satisfaction scores in the quarters ahead by simplifying the menu and the ordering experience, and by elevating its take-out program.

Looking ahead

Consumer confidence is at an all-time high. People are feeling good. However, I don't think this is a tide where all the boats are rising. I think well-positioned brands that are executing are performing really well, and I think you're continuing to see that as others announce their results. I do believe moving forward, the biggest challenge in the industry is going to be the war for talent. -- Lee

Darden Restaurants still plans to add between 45 and 50 restaurants to its base in fiscal 2019, but most of its other growth metrics were boosted following these results. Comparable-store sales should improve by between 2% and 2.5%, rather than the 1% to 2% range management issued back in late June. The industry is growing at about a 1% rate right now, and some peers, like Cracker Barrel, are bracing for slightly worse results.

The company paid employees roughly 5% higher wages last quarter, and executives' comments suggest that this expense might go even higher as the chain works to retain its most valuable workers. The good news for the business is that Darden Restaurants managed higher profitability despite the increased wages, so earnings are now on pace to rise to between $5.52 per share and $5.65 per share in 2019, up roughly 16% over last year's result.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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