Food Fight at Darden

Sometimes, free breadsticks aren't enough.

Thinning margins and sluggish comps at Olive Garden ate into casual-dining juggernaut Darden Restaurants (NYSE: DRI  ) in its latest quarter.

Shares of the company behind Red Lobster, Olive Garden, and LongHorn Steakhouse were off by as much as 6% after this morning's uninspiring fiscal first-quarter report.

Net earnings slipped 6% for the period. Disruptions caused by Hurricane Irene weighed on the restaurant operator's performance, but profitability still would have inched slightly lower on a storm-free basis.

Net revenue climbed 9% to top $1.9 billion. New openings and positive comps at Red Lobster and LongHorn were more than enough to offset the 2.9% eatery-level decline at Olive Garden. There's no point in wondering what exactly is going wrong at the Italian chain known for its complimentary breadsticks and olive-topped salad bowls. Multi-concept operators are rarely running on all cylinders. A year earlier, it was positive comps at Olive Garden that helped pull up the negative same-unit sales at Red Lobster. 

Besides, there's more to running a successful restaurant chain than comps. All three of Darden's main concepts saw food and beverage costs rise faster than sales. In other words, neither chain was necessarily successful in passing on higher commodity costs to its diners.

It's not just Darden. The mighty Chipotle Mexican Grill (NYSE: CMG  ) also saw a spike in food prices before if it could tweak menu prices in its most recent quarter.

As for casual dining, Darden's quarters end a month earlier than rivals Brinker International (NYSE: EAT  ) and Applebee's parent DineEquity (NYSE: DIN  ) . Ruby Tuesday's (NYSE: RT  ) latest quarter also ended last month, but the company doesn't report until next week.

In other words, Darden sets the bar that the others will have to clear in the coming weeks. Analysts will be watching how food and beverage costs are holding up elsewhere, but there won't be a whole lot of hope for casual dining until the economy improves and restaurateurs can wean diners off margin-chomping promotions.

Can you pass the breadsticks?

If restaurant stocks are on your investing menu, consider adding these stocks to My Watchlist to track any developments.

The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill. 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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