Time To Sell Darden And Other Restaurant Stocks

Posted: Oct 02, 2017

Restaurant traffic trends continue to deteriorate.

Up until this past quarter Darden was still seeing traffic growth at Olive Garden.

We believe health care costs are squeezing consumers and traffic will continue to be pressured in the near term.

We recently sold the remainder of our stake in Darden Restaurants (DRI) as we believe overall sector weakness is now beginning to offset the operational improvements new management has been making at the company.

Up until this quarter, Darden had managed to buck the overall downward traffic trend of the restaurant sector. For 2017Q4 the company reported same store traffic at its flagship Olive Garden brand was up 2.0% and up .2% for the year. Yes, comps were low because of previous mismanagement of the chain but we still the results were great given that overall traffic for the sector was down. It’s not easy to convince previously lost customers to come back and give the new Olive Garden a try when traffic for the sector has been falling for six quarters in a row.

This quarter, 2018Q1, gravity finally appears to have caught up with Darden and traffic at Olive Garden fell .3%. Same store sales were still up thanks to pricing and menu mix but we are not sure how long even that can continue.

As the graph below created by Twitter user @GS_CapSF using data from TDn2k shows, restaurant traffic has been negative since February of 2015 and sales have been negative since March of 2016.

Image Source:Pbs.twimg.com

In fact, according to TDn2k the average guest check numbers that have been partially responsible for same store sales being less worse than traffic looks to be under pressure. Here’s what they say about guest checks.

The growth in check averages has slowed in recent months as brands fight the tide of continuing traffic declines. Check increases in 2015 and 2016 were largely an effort to maintain margins in the face of higher labor costs. The slowdown in check growth may be a combination of value platforms and increased deal activity aimed at increasing visitation frequency. It may also be recognition that top-line increases are under more scrutiny despite the potential impact to operating margins. Given that grocery prices have been dropping year over year, it is no surprise that restaurants have been compelled to review their value proposition.

By Strubel Investment Management
September 27, 2017 

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