Olive Garden May Be Finally Turning the Corner

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Olive Garden Breadsticks
Steve Helber/AP
There's dough in breadsticks and green in bottomless salad bowls at Olive Garden again. Parent company Darden Restaurants (DRI) posted better-than-expected quarterly results after Tuesday's market close.

Sales from continuing operations rose nearly 5 percent to $1.56 billion, with adjusted earnings more than doubling to 28 cents a share. Both marks landed just ahead of the $1.55 billion in sales and profit of 27 cents a share that the pros were forecasting. However, the big headline number in Darden's report is that Olive Garden managed to post its first quarter of positive year-over-year growth in comparable-store sales in more than a year. Olive Garden's 0.5 percent uptick in comps may not seem like much. It didn't keep pace with inflation or with what some of its casual-dining rivals are reporting, but it still snaps a streak of five quarters of negative comparable-restaurant sales growth at the once-fading Italian restaurant chain.

Olive Garden Outsmarts Red Lobster

Darden has a lot of young, exciting concepts. There's the beer-heavy Yard House, tropical Bahama Breeze, and health-conscious Seasons 52. There are also plenty of steakhouses, ranging from LongHorn on the casual end to the premium chophouse havens of Eddie V's and The Capital Grille. However, the lion's share of Darden's restaurants until earlier this year was Red Lobster and Olive Garden. The two chains combined for the majority of Darden's business, and when both concepts were struggling, they were dragging the parent down with their sloppy performances.

Darden sold off Red Lobster earlier this year, and it seemed as if Olive Garden would be the next major concept to go if it didn't shape up. After all, Red Lobster was performing horribly, but Olive Garden wasn't doing a whole lot better. Despite Darden owning several concepts, Olive Garden still accounts for 57 percent of the company's total sales, accounting for 838 of Darden's 1,520 eateries.

As Olive Garden goes, so goes Darden, and if we go by Tuesday's quarterly uptick in comps and the overall sharp pop in adjusted profitability, one can argue that there is a glimmer of hope here. It's not perfect; it's worth noting that traffic at Olive Garden was actually down in two of the quarter's three months. Higher pricing and the menu mix helped pull sales higher in each of those three months, but the turnaround will feel a lot more sustainable once customer counts begin growing consistently.

Giving Credit Where Credit Is Due

It remains to be seen if Olive Garden has truly turned things around, but at the very least it appears to be bottoming out. That's welcome news for investors, especially the income chasers who bought into Darden for its juicy 3.9 percent yield that would be sustainable only if Darden's fundamentals are stabilizing.

Some will give credit for Olive Garden's positive quarter to the board shakeup that was orchestrated by Starboard Value, but that would be a bit premature. The shareholder vote that booted out all of the previous board members took place in October, after Olive Garden had already broken through with its positive showing for the month of September.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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