Is It Safe to Go Back in Darden Restaurants?

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There was not much in Darden Restaurants' (NYSE: DRI  ) third quarter report on Wednesday to get investors excited. The operator of Olive Garden, Red Lobster, and LongHorn Steakhouse produced earnings that were mostly in line with tempered expectations. Darden and its competitors in the casual dining space like Chili's operator Brinker International (NYSE: EAT  ) , and DineEquity (NYSE: DIN  ) which is best known for its Applebee's restaurants, faced a difficult holiday season.

Not only was extreme winter weather a drag on traffic, but Christmas Day and New Year's Day both fell on a Saturday, which is typically the largest revenue generating day for restaurants. Darden, whose fiscal quarter runs from December through February, also was affected by Valentine's Day falling on Monday versus Sunday in the previous year. In the face of these challenges, and rising input costs due to inflation, most of Darden's brands fared decently.

However, it is troubling that the Olive Garden was the laggard in the company's restaurant mix. Olive Garden accounts for about half of Darden's total sales. Despite significant marketing expenditure, Olive Garden saw the number of diners decrease each month of the quarter. While its other chains saw better performance, especially LongHorn Steakhouse with a 6.1% same-store sales increase, I'd like to see better comps from its core chain before I get behind the stock.

Managing costs at Darden's current top performer, LongHorn Steakhouse, will be a particular challenge because of the cost of beef. Management indicated that it expects food costs to rise anywhere between 3.5% and 4% during the year, so look for prices at its restaurants to increase as well. This, coupled with the rapid rise in gas prices, could hamper growth at casual dining restaurants in the coming months.

Darden has performed well, in the face of these issues, and has a management team that is battle tested when it comes to managing costs. However, as prices continue to rise, and the company looks for ways to get its important Olive Garden brand back on track, I believe the best place to watch this unfold is on the sidelines.

Andrew Bond owns no shares in the companies listed. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

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  • Report this Comment On March 27, 2011, at 7:39 AM, DrRonPaul4Prez wrote:

    Good analysis. I agree with wanting to see its core brand performing well before getting in. Of course, my restaurant play is WEN.

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