Darden Restaurants’ Q4 and fiscal year earnings report Thursday included several positive headlines, such as LongHorn Steakhouse’s strong results, outperformance on traffic and a steady consumer set.
The company’s earnings call came about a week after Darden finalized its $715 million Ruth’s Chris acquisition, adding to its fine dining portfolio. Ruth’s Chris joins an increasingly diversified roster that includes not only LongHorn and Olive Garden, but also Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger. Though way too early to understand Ruth’s Chris’ impact on Darden’s overall performance, CEO Rick Cardenas expects plenty of synergies to come – to the tune of approximately $20 million by the end of fiscal 2025 primarily through supply chain and G&A savings. He also expects the integration to be accreditive to Darden’s earnings per share by about 10 cents to 12 cents in fiscal 2024 and by 20 cents to 25 cents by fiscal 2025.
This is one of several takeaways from the company’s call. Here are a few more:
- More M&A expected
Cardenas frequently touted the benefits of scale (see those aforementioned synergies), as more companies have come to realize during the past three years of historic tumult. Because of these competitive benefits, Cardenas hinted at more M&A activity from the company.
“If you think about the cash flow or EBITDA, pre-COVID, our EBITDA was about $1.2 billion and today … it's $1.7 billion, $1.8 billion. So that gives us a lot more cash to do those things and increase our share buyback and M&A,” he said. “We’ve talked about M&A often. M&A adds to our scale which is our biggest advantage, and we continue to talk to our board about our best uses of capital and M&A is one of those … We've got plenty of cash, we've got plenty of debt capacity.”
- Retention improvements = increased productivity
Staffing and retention levels continue to improve after a challenging 2021 and early 2022, which is yielding productivity improvements. Executives said restaurant labor improved by 40 basis points on the quarter, and they expect continued improvements “over time,” with training adjustments. Much of the company’s retention progress has come from employees’ first 90 days, which Cardenas said is a key benchmark.
“One of the places that gets you the biggest productivity loss is the turnover in the first 90 days, and that's been a very big improvement for us,” he said. “You have less productivity loss if you have less 90-day turnover, and so we've seen an improvement in turnover. We're still above pre-COVID levels, but we're a lot closer to our pre-COVID levels than we were just last month and the last month before that, the month before that.”
- Consumers haven’t budged much
Despite an increasingly uncertain macroeconomic environment and some signs of trade down, Darden hasn’t experienced “material changes” in check sizes or mix other than some “check management” with alcohol sales at its high-end brands.
“The consumer seems pretty strong overall and there appears to be only minimally switching between lower priced occasions at this point,” Cardenas said. “Overall, we’re not seeing anything concerning.”
- AI exploration
Like most major restaurant companies, Darden is exploring the benefits of artificial intelligence and machine learning. Cardenas said one of the biggest opportunities here is to help with guest-count forecasts to better anticipate traffic, food orders and labor scheduling. Also, the company is leveraging such analytics with pricing and operational execution.
“We’ve got a great analytics team here that does help with our pricing. They look at restaurants, they look at categories, look at items, they look at elasticity,” Cardenas said. “And we can do all that in-house because of our scale.”
Contact Alicia Kelso at [email protected]