The Blubber

Olive Garden and LongHorn Steakhouse have reported last week that households with incomes above $150,000 had more transactions at its restaurants in the most recent quarter than a year ago, whereas transactions among those making less than $50,000 fell.

Darden Restaurants Inc. is experiencing a pullback from lower-income consumers, which is impacting some of its major brands, according to Chief Executive Officer Rick Cardenas.

During a Thursday earnings call, Cardenas noted that transactions from households with incomes below $75,000 were significantly lower than the previous year. He described the operating environment as "tougher than we anticipated," affecting the overall restaurant sector.

The company, which owns Olive Garden and LongHorn Steakhouse, reported sales that missed analysts' expectations. Chief Financial Officer Raj Vennam attributed this to unfavorable winter weather in January, which reduced traffic by 1%, and lower sales in February, exposing consumer weakness, particularly in Texas and California.

Darden also revised its 2024 same-store sales growth outlook downward and forecasted next quarter's same-store sales growth to be between -0.5% and 1%. As a result, the company's shares dropped as much as 6.9% in early New York trading, the largest decline since May 2022.

On the other hand, transactions from households with incomes above $150,000 increased compared to last year, according to Cardenas, marking a reversal from two quarters ago. Sales from its fine-dining brands, Capital Grille and Ruth's Chris Steak House, grew by 58% from the same quarter last year, outpacing the overall company sales growth of 7%.

Cardenas' observations align with broader trends in the restaurant industry. Low- and middle-income consumers have been affected by high credit card balances and delinquencies, while high-income consumers have benefited from rising stock, cryptocurrency, and home prices.

To attract customers, Darden plans to continue pricing below inflation but will avoid becoming a "heavily promotional brand."

The restaurant margin increased to 21.7%, which Vennam attributed to lower-than-expected inflation in commodities and labor, reflecting trends seen in the wider US economy. Darden expects the costs of all commodities except seafood to rise this quarter, with overall price increases reaching 3%.