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Financing

Darden's Q4 margins outstrip pre-COVID levels despite below-inflation pricing

The parent of Olive Garden and LongHorn Steakhouse said its ongoing effort to simplify operations lowered labor costs.
Photograph: Shutterstock

Despite galloping inflation, the parent of Olive Garden and LongHorn Steakhouse revealed Thursday that its restaurant-level margins surpassed pre-COVID levels during the fourth quarter ended May 29, even with price adjustments lagging the inflation rate.

Executives of Darden Restaurants attributed the margin improvement to greater labor efficiencies, or what they characterized as an ongoing drive to simplify operations. The greater productivity more than offset hourly wage inflation of about 9%, CFO Raj Vennam indicated.

Officials also noted investments in technology that help restaurant managers better forecast their supply and labor needs.

They repeatedly mentioned Darden’s ongoing strategy of pricing below the rate of inflation, characterizing it as an investment in its big brands’ value appeal.

But they acknowledged that the chain with the strongest value focus, Cheddar’s Scratch Kitchen, has started to see customers alter their orders because of inflation. CEO Rick Cardenas termed it “a little bit of the check management.”

“It’s not dramatic. It's small,” he told financial analysts. “We're not seeing it at our other brands as much.

He noted that Cheddar’s clientele includes more low-income consumers than other Darden brands do.

Even if the reaction to inflation should spread to the other brands, said Cardenas, the impact will likely be tempered by relief on the cost side.

“If we see a big slowdown in consumer traffic, we would also expect the rate of inflation to decline as well,” he explained.  “And just to give you an idea, a 1% decrease in the rate of inflation [would] more than offset the 2% decrease in traffic.”

Vennam shared Darden’s expectation that commodity inflation will run about 7% in fiscal 2023, with much of it coming in the first half. The company expects labor inflation of 6%.

“We plan to continue underpricing total inflation with annual pricing of approximately 5%,” Vennam said.

Those figures would mark an appreciable slowdown from what Darden saw at the end of fiscal 2022. Vennam said that commodity inflation soared 12% above year-ago levels in the fourth quarter.

Total inflation for the period was clocked at 7.5%. “That brought total pricing to 6% for the quarter and 3% for the full year,” Vennam said.

Darden’s restaurant-level margins before interest, taxes, depreciation and amortization across all its brands was 19.9%, an improvement of 40 basis points above the comparable level of 2019.

Companywide, same-restaurant sales for the fourth quarter rose 11.7% from last year, though with considerable variation across the brands. Eddie V’s, The Capital Grille and the other concepts in Darden’s fine-dining group jumped 34.5%. Its largest holding, Olive Garden, posted a comp gain of 6.5%, while LongHorn generated a 10.5% rise.

Overall, Darden generated a net income for the fourth quarter of $281.7 million, a 23.7% decline from the prior year, on revenues of $2.60 billion, up 14.2%. The year-ago figures included a tax benefit of $63 million.

The company finished the quarter with 1,867 restaurants across nine brands. 

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