Strategic analysis: Should Darden spin off its brands? (Part 7 of 25)
Margins are being squeezed
Further breakdown of Darden’s expenses shows that the declines in margins seen in 2013 have largely been driven by higher labor and restaurant expenses as a percent of sales. While labor and other restaurant expenses made up 31.28% and 15.01% of revenue in 2012, the figure grew to 31.55% and 15.60% in fiscal year 2013. In the latest quarter results, the company saw further deterioration, with labor expense rising 31.9% and restaurant expense jumping to 16.4% of total sales.
Guest traffic falling as labor and restaurant expenses rise
Conversely, Darden’s food costs have remained mostly flat. This means the company is increasing or decreasing costs by the same percent compared to what the average customer is paying if food inflation is negligent. With constant food expense as a percent of sales, rising labor and restaurant expenses as a percent of sales suggest either the company is experiencing lower sales due to lower guest count with constant menu price or that the company is lowering dish prices and cutting costs but unable to generate as much traffic to cover labor expenses.
The chart above shows the breakdown of Darden’s Olive Garden, Red Lobster, and LongHorn Steakhouse same-store sales. Analysts carefully follow same-store sales because they show whether the restaurant’s concept is successful. Same-store sales in turn depend on the average check per guest as well as traffic (guest count).
Poor same-store growth
The last two years of data for same-store growth (sometimes called comparable store growth) at Olive Garden and Red Lobster illustrates Darden’s poor performance. Despite some improvements throughout fiscal year 2011 to 2012, largely because of increases in average check, guest count remains the main problem for Darden’s core brands.
Customers are leaving Olive Garden and Red Lobster
Fiscal year 2012 was the beginning of Darden’s underperformance. Guest count at Olive Garden fell 1.3% despite minimal price increases and food cost inflation (see the first chart—food cost as a percent of sales jumped from 28.98% to 30.76% from fiscal year 2011 to 2012). Performance further deteriorated in 2013, when guest count fell 2.8% for Olive Garden while the average check rose 1.3%, and Red Lobster even saw a decline of 0.4% in guest count despite a 1.8% decrease in average check.
Same-store growth for the latest quarter was worse. Despite a decline of 0.2% in average check, Olive Garden continued to see guest count slide by 3.8%. Without the decrease in average check, Olive Garden likely would have seen further decreases in guest count. At Red Lobster, guest count fell dramatically by -5.9% as the average check rose 0.7%. The company’s Longhorn Steakhouse fared better, with guest count rising from 1.1% for the entire period of fiscal year 2013 to 1.4% while the average check rose 1.8%.
Browse this series on Market Realist:
- Part 1 - Darden analysis: Assessing the success of a Darden brand spinoff
- Part 2 - Darden analysis: Must-know background on Barington Capital Group
- Part 3 - Darden analysis: Why spinoffs outperform the market by 10%
- Investment & Company Information
- Olive Garden
- Red Lobster