Lower-income consumers are pulling back at Olive Garden.
Visits from people earning less than $75,000 a year were “much lower” in the chain’s fiscal third quarter than a year ago, said Rick Cardenas, CEO of Olive Garden owner Darden Restaurants, during an earnings call Thursday.
As a result, the 905-unit Italian casual-dining chain saw same-store sales decline 1.8% year over year for the quarter ended February 25. Traffic fell 3.8%.
The impact was apparently felt industrywide, and Darden said it fared better than most. Its nine full-service brands outperformed industry sales by 320 basis points and traffic by 270 basis points in the period, executives said.
“Every segment in the industry, from QSR on up, was negative in same-restaurant traffic in our third quarter. Every one of them,” Cardenas said.
It comes as Americans continue to face rising prices for all kinds of things. Overall inflation increased by 3.2% year over year in February, including 4.5% for food away from home, according to the U.S. Bureau of Labor Statistics.
Widespread bad weather in January also hurt demand for restaurants, including Darden's.
Drilling down into the company's traffic performance, executives said there has been particular softness at restaurants in Texas and California, some of which was weather-related.
They also noted that while menu mix remains negative year over year, it improved quarter over quarter. At Darden's casual chains, mix was down 40 basis points in Q3 compared to 60 in Q2. Fine-dining menu mix was down about 100 basis points, up from negative 200 a quarter ago, which marked a significant improvement.
Executives declined to go into detail about how demand is trending so far this month, citing the difficulty of accounting for things like spring break and tax returns.
On the bright side for the chain, visits from customers earning more than $150,000 were higher in the third quarter than a year ago, and its customer mix now resembles pre-COVID levels. “At least that makes us feel like we know how to operate in this environment,” Cardenas said.
But Olive Garden is a much different brand today than it was before the pandemic. It has reduced its marketing and discounting in recent years and has instead honed in on operations. It has also kept prices lower than many of its competitors. That formula has made it one of the best performers in full service coming out of the pandemic. And it doesn’t appear ready to abandon ship now.
“We might take marketing up a little bit, but we're not going to change our strategy,” Cardenas said. “We're not going to become a discount, heavily promotional brand.”
He argued that word of mouth remains the chain’s best marketing channel. And he added that the chain “still has levers to pull” to drive traffic. “If we pull them, you'll know after we pull them,” he said.
Nonetheless, Darden downgraded its outlook for the full fiscal year Thursday. It now expects total sales of $11.4 billion, down from $11.5 billion, and same-store sales growth of 1.5% to 2%, down from 2.5% to 3%.
Its stock was down 6% on Thursday afternoon.
For the third quarter, Darden’s total sales rose 6.8%, to $3 billion, thanks to the addition of the 79-unit Ruth’s Chris chain to its results, along with 53 other net new restaurants in the period.
As for Darden’s other brands, LongHorn Steakhouse continued to shine, posting same-store sales growth of 2.3% year over year. Its “other business” division, which includes the 181-unit Cheddar’s Scratch Kitchen, saw same-store sales decline 2.6%, and fine dining recorded a decline of 2.3%. That figure did not factor in Ruth’s sales.
Same-store sales across all nine concepts were down 1% for the quarter.
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