Olive Garden parent Darden Restaurants Inc. says traffic suffered after the chain raised the price on a popular meal deal during the fiscal first quarter.
Darden reported a year-over-year sales increase to $1.94 billion from $1.71 billion in 2016. Adjusted earnings per share were 99 cents. Both results were in line with the FactSet consensus for sales of $1.93 billion and EPS of 99 cents.
Same-store sales for the “legacy” Darden brands were up 1.7 percent, but below the FactSet consensus for a 2.1 percent rise. Olive Garden’s 1.9 percent same-store sales increase was also below the 2.5 percent FactSet estimate.
Other Darden chains include LongHorn Steakhouse, which reported a 2.6 percent same-store increase, and the Capitale Grille, which saw same-store sales increase of 2 percent.
Same-store sales for Cheddar’s Scratch Kitchen, which Darden acquired earlier this year, were down 1.4 percent.
Shares closed down 6.6 percent on Tuesday.
At Olive Garden, $1 was all it took to hurt traffic.
“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,” said Chief Executive Eugene Lee on the Tuesday morning earnings call, according to a FactSet transcript.
Overall, he called the quarter “choppy.” Hurricane Harvey, which made landfall 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 percent, 30 basis points higher than where we ended the quarter,” said Ricardo Cardenas, chief financial officer at Darden.
Still, Lee played up Olive Garden’s value and sales.
“[T]he traffic gap was greater than the sales gap as we continue to underprice inflation,” he said. “And we think we’re underpricing our competitors to improve value.”
Cheddar’s “is heavily penetrated in Texas, and they were impacted more by Hurricane Harvey than Darden overall,” he said.
SunTrust Robinson Humphrey analysts cut its price target to $85 from $95, but maintained their hold rating on shares, noting that the company’s “outperformance at Olive Garden narrowed” as it pulled back from promotions and got less of a lift from its to-go business.
Analysts attributed the price target decrease to “greater top-line uncertainty,” but analysts believe once Cheddar’s integration is further along and the chain rolls out additional tools, service speed and execution should get a boost.
Darden reaffirmed its full-year outlook, which also includes the impact of Hurricane Irma, which Cardenas said is expected to be “approximately double the first-quarter impact of Hurricane Harvey in terms of both same-restaurant sales and profit impact.”
Darden expects sales growth of 11.5 percent to 13 percent from last year’s total, $7.17 billion. The FactSet consensus is for sales of $8.03 billion, about 12 percent higher. Same-restaurant sales for legacy brands are expected to increase 1 percent to 2 percent. And adjusted EPS is forecast to be in the range of $4.38 and $4.50. The FactSet estimate is $4.47.
Darden shares are up nearly 7 percent for the year so far, but down 13.7 percent for the last three months. The S&P 500 is up 2.4 percent for the last three months.