Darden earnings
DRI management took the BRJI approach to the sales slow down, saying it was an old seasonal pattern reemerging, and compared it against "revenge dining."
Seasonal Traffic - "But it appears like now we're getting much closer to what the seasonal patterns were pre-COVID."
Seasonal Traffic - "I will start with seasonality, as we've talked a few times. This is – September is typically the lowest seasonal pattern. Last year, it wasn't—the same thing with August. And so, I would start by saying seasonal patterns are getting more back to normal. When you compare all of our segments to pre-COVID levels, over the last four quarters, we've been pretty consistent."
Check Euphoria - "but one area we're seeing a little bit of check management is with alcohol sales primarily at our higher-end brands, and we think part of this is because of function of last year. Similar to the guest count trends we saw last year, there was probably a little bit of euphoria in check last year."
Check Euphoria - "there is trading down to lower-priced wines and other alcohols on a one-year basis. However, we don't see a big falloff when we look at it versus where we were pre-COVID. So, this feels like there was – clearly goes back to that exuberance that existed a year ago that we're wrapping on and so part of that margin impact is from that."
Inflation is sticky - "commodities might be easing but labor is still pretty high. It's getting a little bit better, but even if commodities are deflationary, there's still net inflation, at least in our business and I'm guessing in other businesses too."
Summary Thoughts
Darden reported better than expected with the benefit of 6% pricing, which will roll off by FY4Q24. The company opened ten new restaurants and highlighted its competitive advantages: scale, data insights, strategic planning, and a results-oriented culture. Darden's internal guest satisfaction metrics are at an all-time high, and its brands have won top spots in key industry categories. Team engagement initiatives, like LongHorn Steakhouse's Grill Masters Legends program and Yard House's Best On Tap competition, are helping to create memorable guest experiences. The company also elaborated on its marketing philosophy and mentioned upcoming promotional events like Olive Garden's Never Ending Pasta Bowl. Post-acquisition, Darden aims to integrate Ruth's Chris seamlessly into its portfolio while maintaining its unique culture and guest experience.
Darden 1Q24's performance saw total sales rising by 11.6% to $2.7 billion, driven by the acquisition of 77 Ruth's Chris Steakhouse locations, 46 net new Darden legacy restaurants, and a 5% increase in same-restaurant sales. Adjusted diluted net earnings per share rose 14.1% to $1.78. The company also returned approximately $300 million to shareholders through dividends and share repurchases. Positive margin analysis showed reduced food and beverage expenses and improved restaurant labor costs, resulting in a restaurant-level EBITDA of 19%, up by 170 basis points from last year.
Margin Analysis total pricing of 6% or 300bpd above the total inflation of 3% helps:
- Food and Beverage Expenses: Down 130 basis points, driven by pricing leverage.
- Restaurant Labor: Improved by 40 basis points due to early productivity gains.
- Restaurant Expenses: Improved by ten basis points.
- Marketing Expenses: Up 20 basis points YoY.
- Restaurant-Level EBITDA: 19%, up 170 basis points YoY.
- G&A Expenses: Up 110 basis points,
The company has raised its synergy expectations for Ruth's Chris acquisition, estimating about $35 million in gross run-rate synergies, and plans to reinvest approximately $10 million into the business. Darden reiterates its full-year financial outlook for fiscal 2024, maintaining an expected adjusted diluted net earnings per share of $8.55 to $8.85.
SYY Conference comments
While we chose to exit our short positions in The Chefs' Warehouse (CHEF) and Sysco Corporation (SYY) earlier than we should have, we continue to have a negative outlook on the food distribution sector. Specifically, we maintain a short position in US Foods Holding Corp. (USFD); the stock is up 17% this year and trades at a premium to SYY; it will not be immune to the industry slowdown.
Sysco Corp reconfirmed its fiscal 2024 guidance, emphasizing its projection in the 'three big boulders' affecting the industry: volume, inflation, and operating expenses. The company expects muted volume growth this year, aligning with a broader trend in the restaurant industry. Regarding inflation, Sysco predicts a deflationary environment in the U.S. for the year's first half, transitioning to mild inflation in the second half. Meanwhile, Sysco's international business, especially in Europe, remains inflationary due to unique regional factors. As for operating expenses, the company plans to continue the improvements made in fiscal 2023. The cumulative impact of these factors leads to a guidance range of $4.20 to $4.40 in earnings per share and approximately $80 billion in top-line sales, signaling healthy year-over-year growth despite challenging market conditions.
Inflation/Deflation
The company addressed concerns about its ability to grow profit in a deflationary environment. The company acknowledges that while volume growth is slowing, it aligns with its projections. Sysco emphasizes that it has a wealth of data from a wide range of restaurants that help closely monitor market trends. If there is a divergence from the forecast, the company assures it will take necessary actions to manage expenses and meet the bottom line. Regarding deflation, SYY addresses the concerns about growing profit amidst varying inflation rates and deflation in different food categories. The company cites its international operations as a buffer against inflation, while its diverse range of 12 categories in the U.S. provides a hedge against significant shifts in any single area. Within proteins, Sysco notes that while poultry is experiencing double-digit deflation, beef has returned to inflation, helping balance the impact. Sysco expects that actions by the supplier community will normalize rates, moving towards a healthy industry inflation range of 2% to 3%.
Growing Local Volumes
Sysco Corp outlined its strategy for driving growth in local and national markets, emphasizing that success doesn't negate the other. Sysco said it has made substantial headway in specialty markets like produce, protein, and Italian cuisine. Two essential programs, Sysco Your Way and Perks, have contributed to the double-digit top and bottom line growth. To accelerate local growth, Sysco plans to improve visit frequency and quality with customers, tweak its compensation model to motivate the sales force, and better leverage digital tools. The company categorically states that it will not use price as a lever to gain business but will focus on service, assortment, and digital capabilities to ensure sustained, profitable growth.
