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What Darden Restaurants Wants Investors to Know

By Demitri Kalogeropoulos - Sep 23, 2019 at 11:30AM

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The Olive Garden owner breaks down another solid quarter for growth.

Darden Restaurants (DRI 0.44%) is still soaking up market share. The full-service dining specialist last week announced solid earnings results that kept it on track for another year of sales growth and improving profitability, even while its industry contracts.

The report contained mostly good news for investors, along with a few worsening metrics such as customer traffic trends. But management saw the overall results as positive and consistent with its growth plans. Let's look at key comments from Darden's earnings call discussing the latest results.

A steak dinner.

Image source: Getty Images.

The strategy is working

I'm particularly pleased with the performance of Olive Garden and Longhorn Steakhouse, given the industry performance and their difficult comparisons over the first quarter of last year.
-- CEO Gene Lee

Darden's comparable-store sales growth slowed to below 1% compared to 2.5% in the prior 12 months. But executives said that this result was still impressive in the context of broader restaurant industry trends.

Olive Garden notched its 20th consecutive quarter of comps growth and outperformed the full-service dining niche by over 3 percentage points. Longhorn Steakhouse, the company's other core property, extended its growth streak to 26 quarters and has beaten its benchmark by 9 percentage points over the past two years.

About that traffic shortfall

The Olive Garden team made a strategic decision to change the order of their first-quarter promotions. This was necessary to separate their two strongest value promotions, Buy One Take One and Never-Ending Pasta Bowl, to more evenly deliver the value messaging throughout the year.
-- Lee

The key weak point in the report was decelerating comps growth, which occurred across Darden's restaurant properties. But Olive Garden drew most of investors' attention, as its customer traffic metric fell into negative territory, suggesting growth struggles ahead.

Management said a primary factor behind the shortfall was just a marketing adjustment that shifted the timing of Olive Garden's two biggest promotions to spread them out more evenly across the year. Still, investors will be closely watching for signs that the chain can continue winning growth through a healthy mix of higher guest counts and rising spending per visit.

Puzzling industry dynamics

The [fact that the restaurant] industry [is] comping negative is surprising, considering unemployment remains at all-time low and there continues to be strong wage growth, which is historically has been positive for the industry.
-- Lee

Executives estimate that sales in the industry fell 1.2% and that overall customer traffic dropped 3.3% this quarter. Those slumps are partly due to the continued growth in popularity of casual dining choices. Yet it's still unusual to see full-service dining fail to expand during a time of growing wages and falling unemployment.

Management didn't offer any definitive explanations for the odd industry dynamics, but its outlook implies that Darden can continue to post modest growth even as sit-down restaurants lose a bit more appeal. The company affirmed its guidance calling for sales gains to decelerate to between 1% and 2% compared to 2.5% last year. On the bright side, Darden is planning to open restaurants at a slightly faster clip. That lift, plus continued expense management, should deliver another year of rising profitability in 2019, executives predict.

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