FOLLOW THE MONEY – JANUARY 15, 2025
The macro winds are blowing fairly hard, as interest rates firm up, including mortgage rates once again well over 7%. The higher rates no doubt have to do with monthly debt issuance approaching $1 trillion, necessary to re-Issue maturing debt plus financing the current deficit. Be aware that on top of the $1.8 trillion last FY ending 9/30, the first three months of the new year, through December, provided a deficit of $753 billion, up 62% YTY. So, with Trump ready to lower tax rates, spend untold amounts to deport immigrants, do whatever it takes to stimulate the economy (and recreate “the greatest economy ever”, which is a fiction) at best the benefits will not be immediate. This year’s deficit points toward $3 trillion and the debt will approach $39 trillion. Elon Musk has already backed off his promise to cut $2 trillion of spending, said that $1 trillion would be impressive, over an unspecified number of years. You can anticipate my opinion that it is all a pipe dream. The debt cannot be “paid back”. It can only be diluted away by depreciating the US Dollar, impoverishing our middle class in the course of the continuing inflation. The relevance of the above is that the greater the debt burden, the more difficult for the economy to grow productively. All that said, we should be grateful always that we (still) live in the greatest country on earth.
In the just concluded holiday season, not much current information is provided by the publicly held restaurant and franchising companies. We will be updated at the ICR conference in Orlando the week of January 13th, with the majority of publicly held restaurant companies presenting. In the meantime: Darden, clearly among the “Best of Breed” full-service operators, reported their quarter ending November 30th, including a conference call on December 16th. Their relatively current financial disclosure, as well as the conference call commentary and “body language”, are about as good as we can do in terms of industry feedback. They told us:
In the quarter ending November 30th, Black Box surveys showed industry SSS up by 1%, while guest counts decreased 1.8%. Darden’s outperformed, with overall SSS up 2.4% with pricing up about 2.9%, so guest counts were almost flat at a negative 0.4%. SSS were positive at three of their four segments, with their four largest brands, Olive Garden (up 2.0%, on top of 4.1% LY), Longhorn (up 7.5%, on top of 4.9%), Yard Houe and Cheddar’s also positive. The Fine Dining segment (Capital Grille, Season’s 52, Eddie V’s, Bahama Breeze) was down 5.8%, 3.3% adjusted for holidays and hurricanes, but improved from a negative 6.0% in Q1. Olive Garden’s updated menu is re-offering fan favorites at compelling price points. Longhorn’s impressive 4%+ traffic is a testament to the price/value (and “perfect grilling”), as well as their dining experience. Cheddar’s is taking advantage of Darden’s purchasing power to offer especially compelling LTO value offerings, including a Texas T-Bone for $21.49. While neither recently purchased Ruth’s Chris or Chuy’s is reporting SSS, both are expected to benefit from Darden’s comprehensive in-house research and IT effort, whose effort includes real-time analytics.
In terms of line expense items: CGS was 80 bp lower. Labor was 20 bp better, in spite of 3.7% labor inflation. Marketing was 30 bp higher, with media for “never ending pasta” called out as that promotion was extended. Restaurant level EBITDA, at 19.5% was 70 bp better than last year. Adjusted G&A was a negligible 10 bp higher. The Q&A from analysts confirmed that aggressive value offerings are necessary to maintain traffic, as indicated by extended time and higher media spend relative to the pasta promotion at Olive Garden. Sounds like most Darden brands, aside from Longhorn, are going to see more marketing support, so competitors should take that under consideration. In terms of cost inflation, the total in the current year is looking like about 2.5%. It was closer to 2.0% in H1 and will perhaps be closer to 3.0% in H2. The cost of proteins (beef, chicken, fish) in total are modestly higher, while the labor cost increase is relatively constant “in the high 3’s”. Though there was some discussion about the potential from working with Uber Direct, it does not sound like takeout, deliver, pickup or the public’s usage of weight control drugs will move the total needle by much. For Darden, at least, it seems like the focus continues to be the in-store dining experience.
A comment worth pinpointing: “Research shows that customers for the casual brands are feeling a little better”…..we’re actually seeing optimism in our restaurants but we’re not seeing as much of an increase in visits from consumers that are above that”.
The takeaway: Darden Restaurants continues to be a formidable competitor. Their attention to operating detail, combined with purchasing, marketing, hiring, training, and motivational “scale”, is without peer, as demonstrated by consistent performance. As an operator, learn everything you can from them. As an investor, you could do a lot worse than owning DRI for the long haul.
Roger Lipton
