Babysitters and Burgers: What Will Olive Garden Do Next?

Olive Garden is pulling out all the stops to accomplish a turnaround. One of the company's recent initiatives is surely one of the most unique you will ever see from a casual-dining restaurant. Sometimes unique (or crazy) is an effective approach, sometimes it's not. What matters most is whether Darden Restaurants (NYSE:DRI) presents a quality investment opportunity going forward.

Unique initiative
On February 7, Olive Garden offered a date night for couples with children. Olive Garden partnered with 145 My Gym locations to make this offer.

Before going out to dinner at an Olive Garden restaurant, a couple could drop their child (or children) off at My Gym for supervision. A reservation was required, and spots were available on a first-come, first-serve basis. After dinner, as long as the couple showed their Olive Garden dinner receipt, they wouldn't be charged by My Gym.

This was really a way for Olive Garden to promote its two-for-$25 special, but buying the special was not necessary for couples to take advantage of the offer. Olive Garden figured that couples would enjoy their discounted meal and come back at later dates. Olive Garden promoted the event via Facebook, Twitter, and Instagram.

Something must be done
The casual dining space has been suffering over the past several years, which stems from the disappearance of the middle class, its key target market. Consider comps performances for some of Olive Garden's peers recently.

For the first nine months of 2013, comps for Applebee's -- a DineEquity  (NYSE: DIN  ) subsidiary -- declined 0.1% (traffic down/average guest check up). For fiscal-year 2013, the comps range has narrowed to negative 0.5% to 0.5% from negative 1.5% to 1.5%. This aren't terrible numbers, but they don't drive a ton of optimism, either.

Brinker International's (NYSE: EAT  ) Chili's has also toed the line with success and failure on a comps basis. In the second quarter, Chili's saw comps increase a measly 0.3%, but that's still better than many other casual restaurant brands. And while domestic franchise-owned locations suffered a 0.7% comps decline, domestic company-owned locations enjoyed a 0.7% comps improvement. 

As far as Olive Garden is concerned, comps declined 0.6% in its most recent quarter. This was better than Red Lobster -- comps plummeted 4.5% -- but not as impressive as 5% and 6.7% jumps at LongHorn Steakhouse and The Capital Grille, respectively. 

Olive Garden might be best known for Italian food. Therefore, you might be wondering why it's being compared to Applebee's and Chili's. There's a simple reason. Although Olive Garden offers Italian food, it still competes for casual diners. In an attempt to achieve market-share gains, it added The Italiano Burger to its menu.

Tasty or not?
The Italiano Burger's menu description: Crispy Italian Prosciutto, fresh Mozzarella Cheese, arugula and marinated tomatoes with a garlic aioli spread with parmesan garlic fries. Price: $13.99. Calories: 1,020 Calories for French fries: 270. This burger might be tasty, but it's certainly not targeting today's health-conscious consumer. 

The Italiano Burger is an interesting attempt and it might drive some increased interest, but an Italian restaurant serving a hamburger is like a steakhouse selling pizza. It just doesn't work. 

The Foolish bottom line
A divestment of Red Lobster would immediately allow Darden to pay off debt, which would then free up more cash flow going forward. This would then allow Darden to return more capital to shareholders and reinvest in its growth brands.

A Red Lobster spin-off is likely. Darden will attempt to save Olive Garden with surprising and unique initiatives, but if it needs to eventually spin off Olive Garden, it will do so. The key is that Darden has several brands that offer significant growth potential. For that fact alone, Darden is likely to remain a long-term winner. Please do your own research prior to investing.

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Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2014, at 8:36 AM, imDanielle2 wrote:

    Sick of hearing about Red Lobster and Olive Garden.. If Darden would not have decided to get involved in politics there would not be so many people boycotting them.. Funny how you never hear about the boycott in the news! Thats what these restaurants are suffering.. They treat/pay their employee's horribly and then bragged about it and blamed others for their actions.. And just like their food, no one is buying it!

  • Report this Comment On February 16, 2014, at 10:06 AM, Howdie wrote:

    Every week it's Olive Garden and Red Lobsters. Will this two crappy restaurants just please go bankrupt now.

  • Report this Comment On February 16, 2014, at 11:59 AM, Nana1 wrote:

    I personally have not heard about a boycott, but if this is true what states are doing it because in

    Arkansas everytime we go to Red Lobster, which is often, it is packed and people waiting for a table. We do not go to Olive Garden because the best meal on their menu they removed which was a parmesan crusted steak. Being diabetic they do not have much to offer for diabetic as everything else is Pasta, Pasta. I enjoy Red Lobster, and would hate to see it close. I really do not care about Darden's politics, if I like what they serve, I will go there, if I do not then I will not go there. If I have a great waiter then he/she gets a great tip that helps compensate their salary. If I have a lousy one then they get compensated the same. Like my food, I pay for what I get and if I do not get good service they do not get a good tip; therefore lowering their salary.

  • Report this Comment On February 16, 2014, at 3:17 PM, CCC wrote:

    I don't know why they keep saying Olive Garden and Red Lobster aren't doing well. In the Denver Metro area, I drive by several OG and RL stores every day. The parking lots are jammed. In fact, we don't go to either of the restaurants very often because you have to wait to get in.

    I've also never heard about a boycott, and if there is one, it's sure doesn't seem to effect the places around here.

  • Report this Comment On February 16, 2014, at 9:31 PM, timgusair wrote:

    Doom and gloom for Red Lobster and The Olive Garden. That's all we have heard for the past few months. According to the news articles, it all has to do with the fact that same store comp sales are negative, and that will push them into bankruptcy in short order. I call bull crap. There has to be more to it than that. Major corporations that have been around for decades go through ups and downs in their sales, market share, stock price, and earnings, and the vast majority of them do not go out of business overnight. The stock market has become a virtual casino for large institutional investors looking for a quick return on their investment, and they are the ones who are responsible for creating a never ending cycle of short term profit syndrome. What ever happened to investors buying a stock based on the actual fundamentals (not some cooked up Wall Street analysis), holding it for the long term, and realizing the return over the life of the stock? If this "short term" mentality existed in the 1970's and 80's, companies like Apple, Microsoft, Walmart, and the like would have been wiped off the market before they could get a foothold. They survived because they suffered through profits and losses with the help of long term investors. Maybe we need to get back to the long term investment mentality so that we can let companies grow and thrive without being choked when they have a bad quarter.

  • Report this Comment On February 17, 2014, at 1:26 PM, ScamuelJones wrote:

    What will Olive Garden and Red Lobster do next? They will continue to BAN the the display of the U. S. flag and continue with their commie leaning, socialist American hating management style and practices!

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