Key Points:
- Observed traffic & spend (per Advan) for Olive Garden were nicely in line (again) with reported results.
- Olive Garden was also able to engineer greater operational efficiencies to drive throughput and table turns, generating both fixed cost leverage and happier customers.
- Like other national full-service brands, Olive Garden enjoyed a nice lift from the World Cup; per the Census MRTS report, we estimate that WC enthusiasm lifted restaurant sales by around 250bps during July.
- The World Cup lift also extended to hospitality services with Aramark scoring very strong organic growth. By contrast, spin-off Vestis reported worse organic declines and missed (as previewed).
Similar to last week’s report on Texas Roadhouse and Sysco, Chili’s Q2 comp-sales and comp-traffic were robust*. Chili’s comp-sales (+5.6%) showed a nice +144bps improvement in the 3-yr CAGR (+14.4%), as did comp-traffic (+1.5%), the 3-yr +220bps to +7.7%. Restaurant-level profit margins expanded +40bps to +18.6%, which stems from fixed-cost leverage (100bps) as it was able to find operational efficiencies to drive an improvement in average dwell time, i.e. it drove an improvement in table turns (higher traffic + lower average stay). (Driving faster turns is one of their newer strategic initiatives.) The comp components were right in line with Advan’s observed figures, as was the case the last few quarters, and so, no surprises for us.
Brinker CEO Kevin Hochman said, “It's important to note in this difficult operating environment that instead of using precious resources and investments on initiatives to drive short-term sales, we at Chili's focus our resource for long-term sustainable growth, improving food service and atmosphere and the team member experience, as well as positioning our brand to be more relevant, easy and distinctive... The American consumer demands experience and great value, and they are showing up for those brands who consistently deliver that.”
On faster throughput and table turns, Houchmen, “Last quarter, I talked about a new initiative we have started with the objective of speeding up restaurant cycle time, meaning looking at everything that goes into the total time of kitchen prep and the dining experience and finding ways to remove time to serve as another traffic building block. Most cycle time improvements may seem small, but will continue to compound to make meaningful impacts as well as improve the guest and team member experience… The first of these initiatives have now been successfully rolled out. Supermarket simple for loyalty reward redemption. In the newly rolled out system, the guest simply puts the rewards telephone number into the Ziosk (its 3P pay-at-the-table payment system). And at the end of the meal, the discount that is available like free chips and salad is automatically removed from the check. Then the Ziosk tells the guests how much they save by being a rewards member, kind of like what happens when you put your loyalty number into the supermarket. The Ziosk software upgrade will reduce the manager time needed to resolve check issues, delivering faster table turns and more importantly, improve the guest dining experience.”
Chili’s September-Q is the last monster 1-yr comp (+21.4%) that it needs to lap. As such, we are not surprised to see the 1-yr traffic slow post the World Cup excitement (which drove the trend up in June); moreover, its encouraging to see the 2-yr traffic CAGR remain at a higher level after having exited that WC excitement. On the call, Houchman said, “July sales and traffic have significantly accelerated versus the fourth quarter, further widening our lead over the casual dining industry.” He also said that the QTD comp was above +6%. Given our observed figures, where traffic is about +0.5%, that would imply a check amount of +5.5%; that’s a lot of Bombshell Margs! Will report back once Q3 is reported.
Census’ MRTS report puts June sales at drinking places well above the prior trend, likely reflective of the ease in gas prices and World Cup excitement; the July figure will not be available until next month’s release. Similarly, July’s food services & drinking places was well above June’s level and much stronger than the April + May average of +3.8%, or by +220bps. If we assume that was largely due to the World Cup, which ended on July 19th, that would put the lift on the pre-July 20th period at +250bps-plus.
Switching over to hospitality services, Aramark FSS US revenue was $3496M was modestly above Advan+MC estimate of $3486M, but well above consensus’ $3440M. Underlying OSG was +10% and CEO John Zilmar said, “We're heading into the fourth quarter with significant momentum across the portfolio, including industry-leading client retention at record levels of approximately 98%, underscoring the strength of our client relationships and the excellence of our service and execution. Accelerating organic revenue growth in every U.S. sector, absent the calendar shift in education, and across all regions within international. New client wins totaling more than $1.6 billion fiscal year-to-date, 51% higher than the comparable prior year period, reflecting strong demand for our hospitality capabilities and the depth of our sales pipeline. U.S. revenue growth in the quarter was further driven by Sports & Entertainment's strong year-over-year performance, which reflected higher revenue from the ongoing Major League Baseball season along with an expanded client portfolio, including a Major League Soccer and Collegiate Athletics. We demonstrated the strength of our capabilities during the 15 FIFA World Cup matches hosted at the stadiums we serve, delivering premium fan experiences amid unprecedented attendance and record per capita spending, with an additional four matches held after quarter-end.”
Aramark spin-off Vistas reported a revenue miss, as previewed; volume declined -4.5%, sequentially worse than the prior quarter’s -1.8% decline.
