DRI Dishes Out Earnings: What Company's Slowing Growth Means for Restaurant Industry

SPEAKER_1 (0:00)

For more on the state of the restaurant space and the consumer, let's bring in our panel. Joining us this morning, Michelle Korsmo, the CEO of the National Restaurant Association, and Nick Setyan, the Managing Director of Restaurants Equity Research at Mizuho. Great to have you both with us. Thank you for joining us. Nick, let's start with you. I'm looking at Darden right now. We're down close to 2 percent in terms of the market reaction. They came in just slightly below expectation, but management did say that they saw the trends accelerate into September. What do you think investors are most focused on in this report?

SPEAKER_2 (0:31)

Well, first, thanks for having me.

The worry was Olive Garden going into the quarter. I think they did a great job of explaining why there was weakness in the quarter. During the World Cup, a lot of customers stayed in at home to watch the games or went to more sports oriented concepts. Then there was a brief period where the cyclospora lettuce outbreak impacted their results. Since then, Olive Garden results have reaccelerated. I think the questions now going forward are whether guidance is realistic or not, full year fiscal 27 guidance is realistic or not. Given the momentum that we're seeing in the near term, both at Olive Garden and the rest of the brands, we actually do think it's realistic if not conservative.

SPEAKER_1 (1:19)

Michelle, when you look across the results for Olive Garden, for Longhorn, for their other concepts, what does it tell you about the health of the American consumer right now?

SPEAKER_3 (1:31)

Well, we know that the consumer confidence numbers are definitely trending downward and that's something everybody worries about. But when you go into the underlying fundamentals, I think one of the great things is you're seeing an increase in jobs in restaurants. So 59,000 jobs added in the month of August in restaurants, which means that operators feel like there's a real need for more expansion among staffing. And so long-term, I think that there is greater confidence. The other thing that we're seeing is a lot more efficiency in each of our labor investments. And that was something that was prominent in the Darden report, is that they're really finding efficiency among labor, which is a better guest experience. And better guest experience is that increased guest count, and that's always good.

SPEAKER_1 (2:14)

And Nick, when we look at Olive Garden and being the weak spot, and you did say your management did highlight what some of the issues were there, and you mentioned them as well. But we saw Longhorn and the other businesses performing better. What does the divergence tell you about where and how consumers are spending their dollars right now?

SPEAKER_2 (2:35)

Casual dining as a category across the board has seen shared gains from the fast food and QSR category. And I think that's continuing. I mean, at the end of the day, casual diners, Olive Garden and the rest of the casual diners have taken much less pricing, cumulative pricing, since 2019 than QSRs, particularly broader QSRs, much more in line with gross re-inflation, maybe even slightly less than gross re-inflation. So we're seeing customers, you know, appreciate that relative value proposition and expanding relative value proposition, you know, at full service casual diners at the expense of QSR. So we're actually seeing quite a bit of strength across casual diners and quite a bit of weakness across the QSR category.

SPEAKER_1 (3:24)

And Michelle, you highlighted that sentiment has been weakening, but the interesting setup to that is that we're not seeing consumers stop spending in this space. So they don't feel good about it, but they're still spending their money. And with restaurants being a discretionary expense, what are you hearing from operators in terms of what they're actually seeing about whether consumers are pulling back? Are they trading down? Are they being more selective? And what's the divide like between the higher-income and lower-income consumers when it comes to traffic and spending?

SPEAKER_3 (3:57)

Yeah, there's a lot in there to unpack. And I think that the overarching message is our surveys show that eight out of ten Americans say that they would spend their discretionary dollars in restaurants if they had more discretionary dollars available. So we think that that's always great for the restaurant industry is knowing that that's where the consumers want to spend their money. And then it gets into the conversation you were just talking about in terms of experience that they're seeking. And so every category of restaurant really provides a different experience, and they're always looking for what that value is. And as you talk about the quick service environment, there's a lot of pressure points on quick service in terms of regulatory and wage increases. And so there's a management through that.