Category: Foodservice

ORLANDO, FLA. — Some good news came Darden Restaurant Inc.’s way in the first quarter ended Aug. 27. Same-restaurant sales rose 5%, and executives increased expected synergies from the acquired Ruth’s Chris Steak House brand.

Still, Orlando-based Darden stuck to its fiscal-year outlook of adjusted diluted net earnings per share from continuing operations of $8.55 to $8.85 per share. Rajesh Vennam, chief financial officer, said he has seen “mixed data” on consumer patterns.

“The primary biggest risk is obviously on the consumer: What happens with the consumer?” he said in a Sept. 21 earnings call to discuss first-quarter results. “Second is on the commodities. We’re trying to understand what’s going to happen, especially with beef — 22% of our basket is beef. So there’s some risk there. Now the pricing in beef has remained pretty high because of the supply being down in the mid-single digits. We’re starting to see some additional imports that might help on the beef front, but it’s too early.

“So I guess all things considered at this point, we felt like it was prudent to stay with the guidance we provided.”

In the quarter Darden had net earnings of $195 million, or $1.61 per share on the common stock, which was up 0.7% from $193 million, or $1.58 per share, in the previous year’s first quarter. The Ruth’s Chris transaction and integration-related costs had a negative impact of 18¢ per share.

Total sales jumped 12% to $2.73 billion from $2.45 billion, driven by the same-restaurant sales increase and sales from adding 77 company-owned Ruth’s Chris Steak House restaurants and 46 other net new restaurants.

The results failed to boost Darden’s stock price, which closed at $145.49 per share on the New York Stock Exchange Sept. 21, down 2.7% from a close of $149.46 on Sept. 20.

While same-restaurant sales in the quarter increased 6% for Olive Garden and 8% for LongHorn Steakhouse, they decreased 2.8% in fine-dining restaurants.

“We are seeing a little softness versus last year with household incomes above $125,000, and that primarily affects our fine-dining brands, but it does affect all of our brands,” said Ricardo Cardenas, president and chief executive officer of Darden Restaurants.

Permitting delays also are hindering plans to open new restaurants.

“We also are being a little selective, especially where inflation and costs have made the economics of the deals a little less attractive, and we generally like to have good margin of error with our projects,” Cardenas said. “And so we’ve turned down a few projects just because costs are a little higher than we wanted them to be.”

Darden Restaurants completed its acquisition of Ruth’s Hospitality Group, Inc. on June 14.

“Previously, we anticipated $20 million in annualized run-rate synergies,” Vennam said. “We now expect approximately $35 million of gross run-rate synergies and other cost savings, and we anticipate investing approximately $10 million into the business, resulting in annualized net run rate synergies of approximately $25 million, and for fiscal 2024, we now expect approximately $12 million of net synergies.”

KANSAS CITY, MO. — The National Restaurant Association’s (NRA) Restaurant Performance Index (RPI) over the past year shows an important industry category in turmoil. Inflation, consumers with less disposable income and rising labor costs are only some of the issues that have combined to challenge the ability of operators to run their businesses profitably.

The RPI is a monthly composite index that tracks the health of the US restaurant industry. It is published on the last business day of each month, and the index is measured in relation to a value of 100, with values above 100 indicating a period of expansion and values below 100 representing category contraction.

For May, the RPI stood at 99.1, up slightly from 98.8 in April. In May 2023, the RPI was 99.6, down 1.3% from 100.9 in April.

Underpinning the RPI are two components — the Current Situation Index that measures current trends in same-store sales, traffic, labor and capital expenditures, and the Expectations Index that measures the six-month outlook of restaurant operators for same-store sales, employees, capital expenditures and business conditions.

The Current Situation Index in May was 98.7, up 0.6% over April but down from 99.7 in May 2023. May 2024 marked the eighth consecutive month the Current Situation Index was in contraction territory due to weak sales and customer traffic, according to the NRA.

The Expectations Index rose to 99.6 in May from 99.5 in April. In May 2023, the Expectation Index also was 99.5. The NRA said the May 2024 index level shows restaurant operators remain uncertain about both sales and the overall economy in the months ahead.

Interestingly, 30% of restaurant operators who responded to the NRA survey said they expected higher sales in six months versus the same period of the previous year. Twenty-five percent indicated they expected lower sales in six months. But when asked about their outlook for general economic conditions in six months, 43% indicated they expect it to be worse versus 13% who expect better conditions in six months.

Lower-income consumers have been the most adversely affected by the economic climate, and Ricardo Cardenas, president and chief executive officer of Darden Restaurants, the owner of restaurant concepts including Olive Garden, Ruth’s Chris and Yard House, said the weakness has hurt the company’s results.

McDonald’s Corp. has seen similar behavior shifts and introduced a national value menu last month to recapture some of its lost business.

But it may be shortsighted to solely blame restaurant category weakness on the overall economy and behavior changes among lower-income consumers. While both are contributors, restaurant outlets operate on slim margins, and other economic shifts related to higher labor costs, reduced traffic at some outlets due to more people working from home and the adoption of a four-day work week by some businesses also may be contributing to this period of contraction.

The restaurant industry has been buffeted by significant challenges since the COVID-19 pandemic. While the category has weathered many of the difficulties, operators may only now be understanding the full scope of changes to the market that have occurred since March 2020.