Darden Is in the Weeds With Olive Garden

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Olive Garden continues to drag parent Darden Restaurants (DRI) down. Darden posted another problematic quarterly report on Friday morning. Sales from continuing operations rose from $1.53 billion to $1.6 billion, but that was no thanks to the restaurant operator's flagship Italian restaurant chain. Olive Garden suffered a 1.3 percent decline in U.S. same-restaurant sales. It's the fifth quarter in a row that the average Olive Garden location has generated lower sales than it did a year earlier.

Net adjusted earnings clocked in at 32 cents a share after backing out a lot of one-time hits related mostly to Darden's sale of Red Lobster earlier this year. This was in line with expectations and flat with what it earned from continuing operations a year earlier.

Olive Garden remains the biggest drag on Darden's performance now that Red Lobster is gone, and that's problematic because the salad- and pasta-tossing chain now accounts for 57 percent of Darden's revenue.

LongHorn Steakhouse -- Darden's second-largest concept-- clocked in with a 2.8 percent uptick in comps. Darden's five smaller concepts combined to post a 2.1 percent increase in same-restaurant sales, with none of them faring as poorly as Olive Garden.

Starboard Thinks It's the Right Side

Starboard Value LP -- the activist investor with an 8.8 percent stake in Darden -- offered up an appetizer ahead of the report. It put out a 294-slide presentation on Thursday night, detailing how it would transform the meandering restaurant operator through cost cuts, real estate monetization moves, international franchising initiatives and an infusion of seasoned leadership.

Starboard feels that its moves could boost the stock past $100, more than doubling Darden's present market cap.

An activist investor can be a positive catalyst for change at a company, but more often than not it's a thorn in the side of the boardroom. Starboard has been vocal about its displeasure with the sale of Red Lobster in a $2.1 billion transaction. It felt that the seafood chain was worth more, even if Darden dangled Red Lobster on a hook for months before anyone stepped up with an offer.

Starboard didn't have a problem with longtime CEO Clarence Otis announcing this summer that he would retire later this year. It has been pushing for a change at the top for some time. However, that apparently isn't enough. Even Darden's decision to nominate just nine candidates to its board of directors -- freeing up Starboard nominees to gain three seats in the dozen-member board -- wasn't enough. It has a bigger plan to make sure that Darden doesn't nominate the majority of the members in its boardroom by proposing a full slate of independent nominees.

Darden has already had to delay its annual shareholder meeting as a result of Starboard's activism. Its annual corporate powwow has been bumped from the end of September to Oct. 10, giving it more time to tackle the proxy battle and gain regulatory clearance. Given Darden's uninspiring financial performance lately, it may have a real fight on its hands at next month's shareholder meeting.

There's No Dough in Breadsticks

Darden argues that Olive Garden is doing just fine. "The Olive Garden brand renaissance is well underway, and the improvements we are seeing in guest satisfaction and traffic trends reinforce our confidence in Olive Garden's potential," the company noted in Friday morning's earnings release.

Renaissance? That's a word that implies rebirth or revival, but it's certainly not happening at Olive Garden. Improving traffic trends? Olive Garden's restaurant traffic fell 0.9 percent in June, 4.3 percent in July, and 2.3 percent in August. How is any of that improvement, especially when it's pitted against last summer's declines? As long as the traffic trend is negative, it's not an improvement.

The rest of Darden is holding up just fine. LongHorn, Yard House, Eddie V's, Bahama Breeze and The Capital Grille are growing. Seasons 52 is the only concept outside of Olive Garden to take a step back, but its same-restaurant sales slipped by a mere 0.3 percent.

Garden Overgrown with Weeds

In a bold move, Darden offered the Never Ending Pasta Pass four days before its earnings report. The pass offers seven weeks of unlimited visits to Olive Garden for its Never Ending Pasta entree for $100.

It was desperate. It worked. Limiting the offer to 1,000 passes resulted in a sellout within minutes, and Olive Garden is generating plenty of publicity as some of the passes are resold on eBay. It was an interesting marketing stunt, but it's not going to help the perception that Olive Garden's food quality isn't as good as it used to be. Despite the repeat visits from these 1,000 buyers, it's also unlikely to turn the negative comps around.

Darden still has a problem on its hands, and its name is Olive Garden.

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 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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