Are Olive Garden and Red Lobster Back?

The spring was much kinder to Darden Restaurants (NYSE: DRI  ) 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 (NASDAQ: PNRA  ) 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 data by YCharts

Look out below
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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  • Report this Comment On June 22, 2013, at 1:01 PM, VegasSmitty wrote:

    Last two time I was in a Red Lobster, the lobster tank was empty. Also the service was so slowwwwwwwwww!

  • Report this Comment On June 22, 2013, at 1:34 PM, Eternallegs wrote:

    There are two Olive Garden's in my neighborhood and they BOTH have HORRIBLE customer service and NEVER have the FEATURED items advertised in their lobbies. When I am in the mood for Italian...I head for Carrabbas. Red Lobster on the other end has great customer service in our neighborhood as well as Longhorn (another Darden Restaurant.) :)

  • Report this Comment On June 22, 2013, at 1:37 PM, SallysF wrote:

    We went to Red Lobster the other day. The portions are getting smaller and smaller. They should issue a magnifying glass with the order. How do they save money on such a small portion of RICE? I mean, how is that really saving money? Do they count rice by the grain?

    When people feel cheated, they do not go back.

  • Report this Comment On June 22, 2013, at 2:01 PM, kkrimmer wrote:

    WILL NOT EAT AT Olive Garden OR Red Lobster... while current anti-American neo-con greedy Otis is CEO.

  • Report this Comment On June 22, 2013, at 2:02 PM, pastorjk wrote:

    My family loves both restaurants and they are both in our top 5. However, Red has been getting too skimpy. I agree about the rice, it's pathetic so say the least! I mean, we're talking a 1/10 a cup it looks like! The potatoes are anemic! However, the proteins are still among the best.

  • Report this Comment On June 22, 2013, at 10:14 PM, gojo1970 wrote:

    Man I hope their not back they suck!

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