Fixing Olive Garden Won't Be Easy

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Earns Darden
Steve Helber/AP
Shares of Olive Garden parent Darden Restaurants (DRI) hit new all-time highs on Friday after the casual-dining bellwether posted better-than-expected quarterly results, but it may be premature to celebrate the attempted turnaround at its flagship chain.

Darden Restaurants runs seven prolific concepts -- including LongHorn Steakhouse, Yard House, Bahama Breeze, Seasons 52, Capital Grille and Eddie V's -- but the biggest contributor to its performance continues to be Olive Garden. More than half of Darden's 1,528 restaurants are Olive Garden locations, and the chain continues to struggle in its pursuit of wooing hungry patrons.

Comparable-restaurant sales rose 2.2 percent at Olive Garden during the holiday quarter, but traffic counts clocked in lower during each of the fiscal period's three months. Guests may be spending more and profit margins are improving, but customers just aren't coming in like they used to.

Olive Garden 2.0

There was a shakeup at Darden late last year. Activist investors complained that Olive Garden was doing everything wrong. In a widely circulated 294-slide presentation, investment adviser Starboard Value took the chain to task for everything from not adding salt to its pasta-boiling water to giving away too many breadsticks. It even complained that Olive Garden was overfilling its salad bowls and dousing them with too much Italian dressing.

The criticism resonated with shareholders, leading investors to sweep out the old leadership regime at Darden's annual shareholder meeting in October. With the new management group in place, Friday's report covered its first full quarter in control.

Darden didn't offer any updates on how its more colorful suggestions are faring in Friday morning's conference call, but it did point to improving margins at Olive Garden since taking over. Darden simplified management layers in November, and that has helped improve labor productivity. However, another factor nudging operating margins at Olive Garden from 20.6 percent to 23 percent over the past year is that it also scaled back its marketing budget. If you've been seeing fewer Olive Garden commercials than you did a few years ago, it's part of the cost-saving process. Then again, given the way that its "When you're here, you're family" ads were lampooned, this may not be a bad thing.

Darden feels that the rollout last year of its highly customizable and value-priced Cucina Mia! menu means that it doesn't have to spend as much to promote seasonal pricing specials. Given the chain's positioning as one of the less expensive Italian casual-dining concepts, it feels that its efforts are better spent online in reaching out to young millennials.

Al Dente

Darden points out that it has now posted back-to-back quarters of positive comps at Olive Garden for the first time since 2010. However, the 2.2 percent year-over-year uptick at the chain comes after a 5.4 percent slide a year earlier, which was after a 4.1 percent drop during the holiday quarter the year before that. Work the math and it means that the typical Olive Garden location is ringing up 7.3 percent less in sales than it did three holiday quarters ago.

The 2.2 percent increase in comps this time around also needs some more clarification: The increase came entirely from folks spending more. Actual guest counts slipped in December, January and February. The new brass is cutting costs and boosting average checks, but it's not a turnaround until customers start coming back.

Darden's trying. It pointed out on Friday morning that takeout orders during the fiscal third quarter soared 22 percent since the prior year. It also recently remodeled some of its restaurants, and the 13 test locations experienced sales growth in the high single digits. These are encouraging signs, but Olive Garden is still not fixed. Darden still has a lot to prove.

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. Check out our free report on one great stock to buy for 2015 and beyond.
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