Olive Garden's September Sales Are Up: Was Management Right All Along?

For the second straight month, same restaurant sales rose at Darden Restaurants' Italian restaurant chain Olive Garden, which, because management is locked in a nasty proxy battle with activist investors, seemingly vindicates their belief they could turn the chain around without selling it.

But are they right?

Activist investors think Olive Garden's board of directors is rank with weeds. Photo: Flickr user Mike Mozart.

Certainly the restaurant operator is using the back-to-back rise in sales to suggest a recovery is taking hold. In a press release announcing the increase, president and COO Gene Lee said the news "further demonstrates that Darden's operational improvements are taking hold."

Give management credit...
After eight straight months of negative comps, and with them dropping in 13 out of the previous 14, two consecutive months in positive territory does appear hopeful.

And for management's sake, they'd better pray that it is.

They're heading into their annual shareholder's meeting on Oct. 10 facing an investor tumult the likes of which they haven't seen before, but was nevertheless brought on by their own actions. It's imperative, therefore, that they convince a majority of investors their vision for Darden is right. Otherwise they'll find themselves thrown out on their ear.

Because hedge fund operator Starboard Value has promised to do just that.

... and assign blame where appropriate
The firestorm of controversy Darden unleashed was the result of its abruptly selling its Red Lobster chain for $2.1 billion to Golden Gate Capital over the objections of Starboard and fellow hedge fund operator Barington Capital, which denounced the price as woefully inadequate.

The sale set in motion Starboard's call for removal of the entire 12-member board of directors, three of whom have since said they will step down. That was meant as a sop to Starboard to give them a three-seat presence on the board, and Darden CEO Clarence Otis also announced that he will be resigning, but the hedge fund is out for blood and is looking for the scalps of the remaining nine directors, who've unleashed a barrage of press releases in recent days that seek to show outside support for its efforts.

They've fired back with a report from proxy firm Egan-Jones that generally supports management's initiatives and remaining board members while issuing a release that sounded like another proxy service, Glass-Lewis, was supportive because it called out the efforts management has made, even though the firm has sided with Starboard. It's also distributed a positive analyst note from Piper Jaffray and challenged the opposition of the influential Institutional Shareholder Services, which supports Starboard Value's nominees.

So with this week's annual meeting looming large, it's not surprising that Darden rushed out a press release highlighting another month of growing sales.

Never a cop around when you need one
However, as positive as this news seems, one number not included was traffic. And that's probably because it's still negative, just as it's been for the past nine straight months and for 15 out of the past 16.

You don't need a cop to direct traffic when there isn't any. Data: Darden Restaurants quarterly SEC filings.

If that is the case, that means Olive Garden hasn't turned the corner at all and is still a restaurant concept in decline.

Same-store sales are an important retail metric, because it typically indicates growth that's achieved organically and not the result of adding more stores, for instance. But that's only the case if those numbers actually reveal more customers returning to its restaurants. Comps can also rise simply because it raised prices; if higher sales numbers aren't supported by greater traffic, then the gains are almost as ephemeral as if they were added by other artificial means.

And that's essentially what we find at Olive Garden. In August, the 0.9% increase in comps was bolstered by a 1.4% rise in pricing and a 1.9% jump in "menu mix." Traffic tumbled 2.3%, though that was better than the 4.3% decline the month before.

That's after juicing the numbers, too
It should also be noted that Olive Garden launched a major promotional offensive in September around its Never Ending Pasta Bowl campaign, including where it sold off 1,000 passes for $100 each to patrons who can eat as much pasta as they want, anytime, for seven weeks.

Unlimited pasta is a safer choice than unlimited crab legs. Photo: Flickr user Krista.

The purpose, of course, was to drive traffic, so those numbers may ultimately come in positive for Darden, but you would imagine the company would have trumpeted those numbers, too, had they actually been good.

As it is, Darden Restaurants has failed to prove that Olive Garden is turning the corner, and that brings into question whether management and the board deserve investor support at the annual meeting. The real test for the Italian food chain will come after all the promotions end and the hubbub of the Red Lobster sale has died down. A year from now, will Olive Garden customers and investors still feel like family and pull up a chair to the table?That remains to be seen. 

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The article Olive Garden's September Sales Are Up: Was Management Right All Along? originally appeared on Fool.com.

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