Q3 2024 Earnings Summary
- Darden Restaurants continues to outperform the industry, achieving a traffic and sales gap of approximately 1,000 basis points over two years by keeping price increases below inflation and offering great everyday value, which helps build traffic and market share.
- LongHorn Steakhouse is excelling due to superior execution, investment in quality, and offering a better value equation, demonstrating resilience in a challenging operating environment and providing insights that can benefit other brands in the portfolio.
- Effective cost management and productivity improvements have enabled Darden to maintain its earnings guidance despite lowering sales expectations, showcasing strong operational efficiency and financial resilience.
- Lower-income consumers are reducing their spending, leading to much lower transactions from households with incomes below $75,000 compared to last year. At every brand, transactions fell from incomes below $50,000, indicating a pullback that could negatively impact sales.
- The company lowered its sales expectations for the fiscal year due to a broader market weakness and softened sales trends, especially in February. This suggests potential challenges in achieving revenue growth targets.
- Industry-wide negative traffic trends are present, with every category in the industry experiencing negative traffic in the quarter. Additionally, competitors are increasing their marketing spend, which may put pressure on Darden's market share if they do not respond accordingly.
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Lower-Income Consumer Impact
Q: How is the pullback of low-income consumers affecting you?
A: We observed that transactions from households with incomes below $75,000 were significantly lower than last year. Conversely, transactions from households above $150,000 were higher. This shift was most pronounced in our Fine Dining segment. We are now back to our pre-COVID mix across all income groups, which we feel confident operating within. -
Margin Management and Outlook
Q: What's driving margin improvement, and will it continue?
A: Margin improvement this year was due to inflation coming in better than expected for both commodities and labor, combined with strong cost management and improved productivity. We also improved waste and benefited from a favorable mix. Looking ahead, we'll share more details in June, but we'll continue using our long-term framework as a guide. -
Pricing Strategy Amid Inflation
Q: Will you continue underpricing inflation?
A: Yes, our strategy is to price below inflation over time. In Q4, we expect overall inflation in the mid-3% range and plan to price at 2% to 2.5%, underpricing inflation by 100 to 150 basis points. We've taken less pricing than competitors over the last four years, giving us room to adjust if needed. -
Unit Growth Expectations
Q: Why are next year's planned openings lower?
A: Our new restaurant projection is within our long-term framework but lower than we'd like due to higher construction costs and longer development timelines. We're willing to slow down to achieve better long-term results. We added 77 restaurants this year through the acquisition of Ruth's Chris. -
Managing in a Tougher Environment
Q: How will you respond if conditions worsen?
A: We'll stick to our strategy and not resort to heavy discounting. We have tactics within our strategy to address challenges without becoming promotional. We're focusing on execution, offering great food, service, and atmosphere to increase frequency with our core guests. -
Maintaining Brand Visibility
Q: How do you keep brands top of mind amid increased marketing by others?
A: Olive Garden remained in the top three in share of voice, even with our current spending levels. We utilize our eClub and digital initiatives to engage consumers. Most importantly, we rely on guest recommendations, focusing on delivering exceptional experiences. -
Regional Sales Differences
Q: Are you seeing sales differences across regions?
A: We continue to see softness in Texas and California. Florida was slightly weaker but not significantly. Weather impacts in Q3 disproportionately affected Texas and California. -
Off-Premise Performance
Q: How did off-premise sales perform?
A: Off-premise sales as a percentage were slightly below last year but remained stable. Olive Garden's off-premise was around 26%, and LongHorn's was around 13%. Our focus on execution has helped maintain stability in this channel. -
Menu Innovation
Q: Any plans for menu innovation at Olive Garden and LongHorn?
A: Yes, we're balancing innovation with improving existing items. LongHorn, for example, has successfully introduced lamb. We aim to offer new items without overwhelming guests or moving back to short-term promotions. -
Industry Capacity Trends
Q: What's your view on industry capacity and closures?
A: The industry is still down about 10% in capacity since COVID. In the last 9–12 months, there have been more closures than openings. Challenges like increased regulation and higher financing costs make it hard to open new restaurants.