Olive Garden, Ruth's Chris parent's lower-income customer is spending much less

By Tomi Kilgore

Same-restaurant sales surprisingly declined at Olive Garden and in fine dining, which includes Capital Grille and Ruth's Chris chains

Shares of Darden Restaurants Inc. took a bitter turn Thursday, after the parent of the Olive Garden and Ruth's Chris Steak House chains reported a surprise decline in same-restaurant sales, as lower income customers are spending much less.

The company also missed fiscal third-quarter expectations for total sales and lowered its full-year sales guidance, but nudged up its outlook for adjusted profit.

The stock (DRI) dropped 6.5% in afternoon trading, which would put it on track for the biggest one-day selloff since it lost 7.4% on May 18, 2022.

The company said that the quarter started well in December, with a strong performance during the holiday period, but then "unfavorable" winter weather hurt traffic in January.

"And while February results improved, we experienced some underlying softness we had not seen in the months leading up to January," said Chief Executive Rick Cardenas, according to a FactSet transcript of the post-earnings call with analysts.

The softness comes Cardenas said "the lower income consumer does appear to be pulling back," which puts the company's mix of guests back to what it was before the COVID pandemic.

Transactions from households with incomes of more than $150,000 were higher than a year ago, but spending by customers with incomes below $75,000 were "much lower than last year at every brand."

And transactions from customers with incomes below $50,000 also fell at every brand.

Same-restaurant sales for the quarter to Feb. 25, or sales of restaurants open at least 16 months, were down 1.0%, while the FactSet consensus called for 1.1% growth.

Olive Garden's same-restaurant sales declined 1.8% versus expectations of a 1.3% increase. Sales in the fine-dining restaurants - which include The Capital Grille and now Ruth's Chris Steak House - fell 2.3%, short of the expected 1.1% rise.

Ruth's Chris's sales were not calculated in same-restaurant sales, since the acquisition of the chain closed less than 16 months ago, in June 2023.

Same-restaurant sales of Long Horn Steakhouse increased 2.3%, but missed expectations for 2.9% growth.

CEO Cardenas said that while the operating environment was "tougher than we anticipated," the company outperformed the industry for same-restaurant sales and traffic.

Meanwhile, total sales grew 6.8% to $2.97 billion, missing the FactSet consensus of $3.03 billion.

Olive Garden total sales edged up 0.7% to $1.31 billion, below expectations of $1.36 billion. Fine dining sales, which includes sales from Ruth's Chris, climbed 58.3% to $372.9 million to beat expectations of $370.2 million.

Net income rose to $312.9 million, or $2.60 a share, from $286.8 million, or $2.34 a share, in the same period a year ago. Excluding nonrecurring items, the adjusted earnings-per-share of $2.62 matched the FactSet consensus.

Looking ahead, the company trimmed its total sales guidance to $11.4 billion from $11.5 billion and cut its same-restaurant sales growth outlook to 1.5% to 2.0% from 2.5% to 3.0%, but nudged up its adjusted EPS guidance range to $8.80 to $8.90 from $8.75 to $8.90.

Separately, the company said it authorized a new $1 billion stock-repurchase program, with no expiration date. The new program represents about 5.1% of Darden's current market capitalization of $19.5 billion.

The stock's selloff as turned it negative for the year, as it is now down 0.7% year to date, while the S&P 500 has advanced 10%.

-Tomi Kilgore

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03-21-24 1449ET

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