In early May, 2018, the largest Applebee’s franchisee in the country, RMH Franchise Holdings, filed for bankruptcy. Though its story offers another cautionary tale for those following the decline of casual-dining restaurants, two chains have projected sales growth and earnings-per-share increasing, proving our maxim that, even when everyone is down, someone is still up.
The following case studies show how these two brands are adapting their business model to address the guests’ desire for convenience without compromising on their brands’ core promises.
Fast-Casual Bubba’s 33 Boosts Texas Roadhouse’s Sales Growth
Steakhouse chain Texas Roadhouse grew same-store sales in 2017 by 4.7%, primarily thanks to a 3.6% boost in guest count, up from 2.1% in 2016. The company is forecasting steady sales growth for the next two years (10.64% in 2018; 10.80% in 2019) as well.
The strategy is driven by new store openings. For 2018, it plans to open around 30 new restaurants. A significant number of these locations will be Bubba’s 33 units, which have a more fast-casual feel, showing that the executive team is closely tracking consumer preferences.
The Bubba’s concept yields higher margins than Texas Roadhouse locations. In years to come, Bubba’s 33 stores are expected to boost the company’s overall profit margins, lifting bottom-line performance.
Earnings-per-share outlooks are also optimistic, with growth rates of 20.8% in 2018 and 13.0% in 2019. As exciting as these figures are, the steakhouse chain has consistently missed the mark on its forecasts. The most significant misses were during Q4-2016 (-21.62%), when same-store sales fell below the estimate of 3.1% by almost two percentage points, and in Q2-2015 (-18.92%), when drought conditions in Texas and Oklahoma inflated beef prices.
In the fourth quarter of 2016, the chain’s same-store sales grew only 1.2%, down from 4.5% growth the year before. The company attributed the decline to “the calendar shift of the Christmas holiday.” Christmas fell on a Sunday in 2016, versus Friday in 2015.
In Q2-2015, Texas Roadhouse reported earnings of $0.30, coming in below the Reutersconsensus estimate of $0.37. High beef prices added nearly 100 basis points to the food costs incurred by the company compared to 2014.
Darden Expands Takeout to Speed Sales Growth
Darden Restaurants also has an optimistic revenue outlook, though less optimistic than their steakhouse competitors. Analysts expect that the company’s sales will increase by 12.58% and 4.61% in 2018 and 2019, respectively. This growth will come primarily from new locations — 10–12 Olive Gardens and 10–13 LongHorn Steakhouses in 2018 — as same-store sales are expected to increase only between 1% and 2% in 2018. Meanwhile, Darden will invest between $400–$450 million in capital expenditure to build new restaurants and remodel existing ones.
Darden is also paying attention to consumer preferences, focusing more on takeout services. Indeed, Olive Garden is ripe for this kind of expansion, as pasta travels well and the chain has invested in packaging that preserves its dishes’ quality. In Q3-2018, off-premise sales increased 13%, showing that this casual-dining chain is starting to recognize diners’ desire for convenience.
In the earnings conference call for that quarter, CEO Gene Lee announced that the company would limit the number its promotions and turn its Buy One, Take One deal into a limited time offer. This is a smart move, as consumers are turned off by never-ending promotions, deals, and discounts, seeing them as evidence a restaurant doesn’t stand by its products.
Darden is projecting steady earnings-per-share growth over the next two years (13.0% in 2018, followed by 12.8% in 2019), with a slight slowdown in 2020 (9.3%). Historically, Darden has had volatile EPS figures, but the trend has been upward, and it has consistently exceeded consensus forecasts (by 18.77% in 2015, then by the less-staggering 2.41% and 2.93% in 2016 and 2017 respectively).
Both DRI and TXRH are adapting their business models to address consumers’ desires for fast and convenient options. By pursuing quicker-service models and takeout, these chains have the potential of serving their guests on two occasions: as a fast option when time is short and as a nice, sit-down experience.
ABOUT AARON ALLEN & ASSOCIATES
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.