Olive Garden Sales Grow Amid Spike in Food Costs

Darden Restaurants is seeing sales grow in the face of spiking food costs.

The company, which owns chains that include Olive Garden and Longhorn Steakhouse, posted quarterly earnings Thursday (Sept. 18) that indicated resilience in consumer spending on casual dining despite wider economic pressures. The company reported a 4.7% increase in adjusted earnings of $1.97 per share, a 12.6% increase year over year.

“We had a strong start to the fiscal year with same-restaurant sales and earnings growth that exceeded our expectations,” Rick Cardenas, the company’s CEO, said in a news release.

During an earnings call, management described shifts in consumer behavior and significant headwinds from food costs. Cardenas said Darden is seeing guests gravitate toward “price certainty… or greater perceived value, even if the item is a high price.”

In a nod to affordability, Olive Garden is testing smaller portions at reduced prices in about 40% of its restaurants, an initiative showing an “encouraging” initial response.

“It’s still pretty early. We do believe in the long run this is a traffic driver,” the CEO said. “It will dilute our check a little bit as if people trade from a higher portion size item to a lower portion size item. But we believe that’s the portion that those guests want.”

The company is navigating increasing costs by deliberately keeping its menu price hikes below its own rate of inflation, management said.

This move comes as consumers are pulling back on spending. Recent data from the Federal Reserve shows that in August, the median year-over-year increase in monthly household spending softened to 4.1%, compared to 4.5% four months earlier.

For the full year, “our pricing … will probably … end up being below inflation,” said Raj Vennam, Darden’s chief financial officer, calling it a long-term investment in the business’s health.

The company projects its pricing in the second quarter will be about 100 basis points below its total inflation. That strategy faces a test as Darden raised its commodity inflation forecast for the year to 3% to 4%.

Vennam attributed the increase to a “significant spike in beef costs” and higher seafood inflation “due to the tariffs on shrimp.” Because management believes current beef prices are “not sustainable,” the company has only locked in prices for about a quarter of its supply over the next six months.

Despite these cost pressures, Darden raised its full-year total sales growth forecast, reflecting confidence in its new restaurant pipeline and its strategy to woo value-conscious diners.