Are Olive Garden and Red Lobster Back?


The spring was much kinder to Darden Restaurants than the winter was. After staying away in December, January, and February, guests are starting to trickle back into Olive Garden and Red Lobster locations.

This week, Darden reported traffic growth at its flagship restaurants for the first time in six months. Red Lobster notched a strong 6% boost in customers in March, after both brands endured a brutal February plunge.

At that time, Darden said rising gas prices and payroll taxes had hurt its customers' purchasing power. But the restaurants' troubles went further back than that:

Source: Darden Restaurants financial filings.

The difference this spring is that Darden made progress in getting its menu prices in line with what diners expect. The company decided to match promotions from rivals and to focus on what it called "aggressively addressing affordability on our core menu items." In other words, Darden cut its prices.

The company didn't have much choice. Besides dealing with increasingly frugal consumers, Darden has had seen fast-casual restaurants such as Panera Bread expand into its turf. Panera this spring bulked up its food offerings by adding a line of pasta dishes to the menu. That helped the company log better than 3% sales growth for the first quarter, and an expanded operating margin to boot.

Darden Restaurant's profits, meanwhile have been heading in the opposite direction:

DRI Operating Margin TTM Chart
DRI Operating Margin TTM Chart

DRI Operating Margin TTM data by YCharts

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There will be more profit headaches ahead as the company continues to prioritize customer traffic over restaurant margins. As CEO Clarence Otis explained in a conference call for investors, "We're prepared to accept some pressure on margins ... to really renew same-restaurant guest count growth."

That's the right move, given the tough competitive environment. Darden will have to get diners back in its booths before it can hope to persuade them to splurge on more expensive menu options. So the first step is getting traffic levels back up, and this spring was a good start.

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Fool contributor Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Panera Bread and owns shares of Darden Restaurants and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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