Darden DRI Traffic Hit after Olive Garden's Price Hike

Darden DRI, the parent company of Olive Garden, reported a decrease in shares after Hurricane Harvey and a price hike damaged results.

Olive Garden traffic took a hit when one of the restaurant’s popular meal deals increased by a dollar during the fiscal first quarter. Shares are down nearly 6 percent.  

“We made major changes to our strongest traffic driver, which is soup, salad and breadsticks at $5.99, and we moved that to $6.99, which drove less traffic, however was significantly more profitable,” stated Chief Executive Eugene Lee on the Tuesday morning earnings call, according to an analytics company's transcript. 

A year-over-year sales increase from $1.71 billion in 2016 to the current $1.94 billion was reported Darden DRI while its adjusted earnings per share were 99 cents. Both results were in accordance with the consensus for sales of $1.93 billion and EPS of 99 cents.

Same-store sales for the Darden brands were up 1.7%, but below the consensus for a 2.1% increase. Other Darden chains include LongHorn Steakhouse, which projected a 2.6% same-store increase, and 2% for the Capitale Grill.

Cheddar’s Scratch Kitchen, which Darden bought earlier this year, reported its same-store sales were down 1.4%. Overall, Lee called the quarter “choppy.” Landfall of Hurricane Harvey on the last weekend of Darden’s quarter also had an impact.

“The day before Harvey made landfall in Texas, same-restaurant sales quarter-to-date were running plus 2%, 30 basis points higher than where we ended the quarter,” stated Ricardo Cardenas, chief financial officer at Darden.

Still, Lee played up Olive Garden’s value and sales, pointing out that the traffic gap were greater than the sales gap as they continue to under-price inflation.

Analysts Take on Olive Garden’s Traffic Hit

Darden included the impact of Hurricane Irma in its reaffirmation with its full-year outlook, which Rick Cardenas, Darden's CFO said is expected to be “approximately double the first-quarter impact of Hurricane Harvey in terms of both same-restaurant sales and profit impact.”

 Sun Trust Robinson Humphrey analysts maintained their hold rating on shares after cutting its price target to $85 from $95, noting that the company’s “outperformance at Olive Garden narrowed”, getting less of a lift from its to-go business as it pulled back from promotions.

Analysts believe once Cheddar’s integration progresses and the chain rolls out additional tools, its service speed along with execution should get a boost. They also credited the price target decrease to “greater top-line uncertainty.”

Darden sales are expected to grow from 11.5% to 13% from last year’s total, $7.17 billion. The company’s shares are up nearly 7% so far for the year, but down 13.7% for the last three months.