Darden Restaurants (DRI 0.14%) exhibited strong same-store sales growth in its latest fiscal period (third quarter of 2023), and investors cheered by pushing the stock higher. There were some important differences among the company's core nameplates, however, that suggest its growth plans are on solid ground.
And Darden sees that a key ingredient is investing in its people as operating a sit-down restaurant isn't just about dishing food out to tables. Let's see what this could mean for investors.
The numbers
In the third quarter of its fiscal 2023, same-store sales growth came in at 11.7%. That's a very good number, and it includes the results from four different divisions. The company's fine dining and "other" brands groups both were in line with the 11.7% figure, its LongHorn Steakhouse business was shy at 10.8%, and Olive Garden excelled at 12.3%. Clearly, something was going particularly well at Olive Garden.
Image source: Getty Images.
There's a couple of takeaways from this information. First, Olive Garden makes up roughly 45% of the company's revenue. It is, by far, the most important brand for Darden, and its performance has a disproportionate effect on earnings and investor sentiment. Thus, the strong same-store sales result at Olive Garden was a welcome bit of news.
Secondly, Olive Garden is something of a value-conscious brand. So given the economic uncertainty today, it makes some sense that customers looking for a good deal would choose Olive Garden. The all-you-can-eat breadsticks and soup/salad with a meal purchase are very compelling if you are looking to save some money while still getting the chance to eat out. The same-store sales result suggests that the brand positioning appears to be working.
But one thing the company also pointed out about Olive Garden is that it has more managers per restaurant than ever before in this brand concept. CEO Ricardo Cardenas noted in the company's latest conference call:
The manager role in our restaurants is the most important role we have, especially the general manager or the managing partner, and being fully staffed there gives them more time to spend with their team and train their team, develop them, make them stronger, and just spend that time forecasting their business and spending time with guests. If you under-staff managers, the restaurant doesn't run as well.
So not only are customers showing up for the attractive price points, but also for the strong customer service.
There's much more to the manager story
While the service component to a sit-down restaurant is clearly important, there's another benefit that is harder to see. To this end, Cardenas added:
But the other thing about being fully staffed with managers and have the highest staffing in our history is that, that helps us open restaurants going forward, right. If you think about our pipeline of new units, we have about 25 net openings coming in this quarter, and we are ready for it with the managers that we have.
That's for the fourth quarter of fiscal 2023. For the full year, the company believes it will get to 55 total new-store openings. Looking out to fiscal 2024, the company plans on opening another 50 to 55 locations. While not all of these will be Olive Garden restaurants, this concept will be the one that opens the most new stores. And with so many trained managers, the chances for success in this expansion effort increase materially.
Each new restaurant adds revenue to the top line and helps the company grow, which seems like an obvious statement. However, the value of getting a location up and running quickly and smoothly shouldn't be ignored. As Darden looks to the future, same-store sales are expected to vary over time. But the value of having a large and well-trained restaurant-level managerial staff should only add to the upside potential of the business.
Building from the ground up
Investors often overlook the tiny details that can make a huge difference in the performance of a company, like investing in its people so it can execute on its store opening plans. Sure, strong same-store growth is important and worth paying attention to, but sometimes the nuances underneath the numbers are what give the best indication of the future potential.
Darden stock isn't exactly cheap today, but if you are looking for a consumer discretionary business that's performing well in a tough environment, and appears likely to continue to do so, then the Olive Garden owner should probably be on your short list.
