Olive Garden Continues to Prove Darden Wrong

Source: Wikimedia Commons.

So, what will Darden Restaurants' excuse be next quarter if its Olive Garden chain fails to achieve the turnaround it's touting? Having ignored investor entreaties to sell or spin off the chain along with Red Lobster, which it will separate from next month, its fate rests fully on the shoulders of management.

The ailing restaurant operator reported fiscal fourth-quarter results last week that indicate improvements are not going according to plan. Revenues were up less than 1% year over year, driven more by the addition of new restaurants than by increased sales, while earnings plunged 36%.

Although its largely successful Long Horn Steakhouse enjoyed positive same-store sales for the quarter -- unlike both Red Lobster and Olive Garden, which continued their dismal declines -- this was based on higher prices as traffic continued falling. In March, April, and May, comps were up, but price hikes matched or exceeded their rise in each period, accounting for all the increase. Only in its small, specialty restaurant group was it able to achieve any real growth, with revenues jumping 16% and comps higher at virtually all the chains.

Source: Darden Restaurants SEC filings.

Olive Garden, then, really becomes the linchpin for future growth. It now accounts for 56% of Darden's total revenues, yet they were nearly 3% lower than last year, and with same-store sales still in a tailspin, there's no room for error. Management says remodeling the chain's decor will be key to its renaissance, along with new menu items, yet it's swimming against the tide as casual dining generally is on the decline, and Italian eateries specifically are feeling the pinch. 

Source: Darden Restaurants Q4 2013 filing.

Bloomin' Brands is trying a new menu to reverse lower sales at its Carrabba's Italian Grill, where comps fell 1.8% in the first quarter of 2014, the worst performer in its portfolio. Similarly, Ignite Restaurant Group saw comparable sales at Romano's Macaroni Grill tumble more than 4% from a year ago, and similar to Red Lobster, its seafood concept Joe's Crab Shack was also falling lower with same-restaurant sales down 6%. Only Brinker International was able to record any positive sales growth, and even that was anemic at 0.8%, albeit it was the 17th consecutive quarter of positive comps it achieved. But again, the growth was the result of price hikes, as traffic was down all across the quarter and has been for some time.

Darden's management is promising that growth is about to come to Olive Garden, saying that with the messy promotional environment of the fourth quarter out of the way, June is off to a strong start. Whether that's true remains to be seen. Only four months out of the past 24 have seen positive comps growth, so any momentum it sees this month could easily dissipate come July.

Source: Darden Restaurants SEC filings.

It's not about to assuage restive shareholders, either, particularly hedge fund operator Starboard Value, which is ready to storm the ramparts at the upcoming annual shareholders meeting, where it is planning on challenging the entire board with a 12-candidate slate of its own.

While the date of the meeting has yet to be set, it may just come after it reports its first fiscal reports in mid-September so that it has as much time as possible to point to improving operations -- assuming operations actually improve. As of now, though, Olive Garden is wilting on the vine, and investors may still want to cut it -- and management -- off at the roots when they finally gather together.

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The article Olive Garden Continues to Prove Darden Wrong originally appeared on Fool.com.

Rich Duprey 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. We Fools may not 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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