Can Darden Restaurants Really Turn Olive Garden Around?

If Darden Restaurants (NYSE: DRI  ) gets its way and sells the Red Lobster brand for $2.1 billion to private equity firm Golden Gate Capital, the onus will be on management to prove it was right that the Olive Garden Italian eatery was worth hanging on to and can return to a growth concept. It's going to be a hard case to make.

The restaurant operator's stiff neck in refusing to lop off that branch along with the seafood chain means it will need more than cosmetic changes like a new menu to turn it around. Fiscal third-quarter sales of $929 million were down 3.4% over last year due to a 5.4% decline in same-restaurant sales at its U.S. locations even as it opened 18 more stores.

A large part of the problem is that the Italian restaurant market has grown far more competitive even as consumers shy away from casual-dining restaurants. The secular decline in sales and units is widespread as the fast-casual niche grabs the attention of diners' imaginations and wallets. The combination of a pleasant dining atmosphere, fast service, personalized menus with fresh ingredients, and reasonable value makes it a hard combination to go up against.

According to the market researchers at NPD Group, fast-casual chains once again outpaced the rest of the restaurant industry's unit growth in 2013, expanding the total number of locations open by 6%, compared to a 1% decline in the number of casual, midscale, family, and fine-dining establishments. And where total industry traffic was flat year over year, the fast-casual segment was the only one experiencing growth, rising 8% from 2012.

Bloomin' Brands (NASDAQ: BLMN  ) says its Carrabba's Italian Grill could not drive incremental traffic despite a new menu, and witnessed a 5% drop in traffic in the dinner daypart in the first quarter while lunch was down 2%. It maintains that until the concept can prove it's able to lift traffic, it won't be expanding the chain aggressively, particularly as both its Bonefish Grill and Outback Steakhouse offer far more opportunities for growth than does the Italian chain.

Source: Company SEC filings.

Maggiano's Little Italy also dealt owner Brinker International (NYSE: EAT  ) a similar setback, as traffic was down almost 1% in the quarter, though as the months progressed the numbers improved. Darden itself experienced dramatic declines in traffic at Olive Garden, at times even surpassing Red Lobster's double-digit falloff, while Ignite Restaurant Group (NASDAQ: IRG  )  saw same-restaurant revenues at Macaroni Grill, which it bought last April, were down 4.1%, though it blamed poor winter weather for half or more of the decline. Still, that means it has problems beyond the "snow in winter" effect for falling sales.

And Darden also has significant problems generating sales at its Italian restaurant as comps maintain a steady continuous slide. While sales bounce around from month to month, and yes, weather can play a role, we also see that the spikes never quite reach the highs previously attained and that the depths to which they fall seem to get steeper.

Source: Darden Restaurants SEC filings.

Activist shareholder Starboard Value accused Darden management of leaving more than $800 million on the table at the time it was trying to spin off Red Lobster, and the case was made that it was really the two chains together that was the anchor dragging Darden down, so a holistic approach was needed to correcting the problems.

With the entire space weak or declining, consumers moving away from casual dining, a systemic problem still in place at the restaurant group, and a management team apparently unwilling to listen to shareholders, there doesn't seem to be any significant change for the better on the horizon.

Yet because Darden's management chose to burn the bridges behind it as it unloads Red Lobster, it has only a few months before the annual shareholders meeting to prove it charted the correct course. Investor anger may well boil over at the yearly gathering, and those directors up for reelection may find themselves tossed overboard.

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  • Report this Comment On May 21, 2014, at 1:55 PM, pondee619 wrote:

    But Olive Garden isn't good, It's mediocre at best. With all the GOOD Mom and Pop Italian restaurants around mediocre isn't going to cut it. I'm surprised that Olive Garden grew as large as it did. It's a shame that Americans don't know, or appreciate, good cooking/food anymore. Here in Northern NJ you can get a better meal at a pizzeria than at Olive Garden. Red Lobster's pre-packaged flash frozen run through a broiler just before serving fare isn't much better. both establishements aren't much better (if at all) a than boil in the bag/frozen TV dinner. Mores the pity that America no longer realizes this.

  • Report this Comment On May 21, 2014, at 2:21 PM, TMFCop wrote:

    pondee619,

    I live in northern NJ as well and the quality of corner pizzeria food may be the reason I'm also not enamored of the growth prospects for so-called fast casual pizza shops.

    I've always found consistency to be the biggest knock against Olive Garden and Red Lobster...and TGI Friday's, Houlihan's, etc.

    My family owned a number of pizzerias over the years, I've worked in my fair share of them, so I'm quite familiar with the freshness of the ingredients that go into each dish. It's hard to beat then when you need to ship tons of food to restaurants sprawled all over the country.

    Cheers,

    Rich

  • Report this Comment On May 26, 2014, at 3:51 PM, jabberdagger wrote:

    As a marketing major and a darden employee... I feel much of olive gardens decline of growth is due to decline quality change in their ingrediants. Ranging from their alfredo sauce to their soups, perhaps even some of their pasta. many local other italian restaurants like carrabas spends more prep time into making everything from scratch. Which for an italian restaurant, you cant lower the quality and simply sell items based simply on price. quality must have its strong focus, especially for an italian restaurant unless if its a pizza place.

    I think they also overkilled the unlimited soup/salad combo deal, too much sales promotion in that area. guests may get that 6-7 dollar item but they will sit on that until they are ready to get up and go. thats a very narrow experience of the true italian feel of the food and restaurant that the place could really have. It has made many of their severs upset cause during lunch shifts year round, it would be hard to make a decent day in tips based on the price point of the sales promotion.

    Whatever a company does though, do NOT decline the quality of your product... bad things will happen. There are many examples were this can be seen on both large and small scales. such as schlitz, they cheapen their beer and budweiser rose to the top. pert changed their womens shampoo/conditioner into a 2 in 1 product. In the eyes of the majority of women, they like to dab a lil shampoo, rinse... and then conditioner and rinse... in 2 steps- they perceive that as higher quality. The list could go on, but thats all i got for now.

    I am glad darden is keeping olive garden, they have much potential to recover.

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