Why It's Too Soon For Darden Restaurants to Declare an Olive Garden Victory

Darden Restaurants' Olive Garden turnaround is too soon to call a success.

Jul 26, 2014 at 10:00AM

Aboutus
Olive Garden.  
Source:  Darden Restaurants

"The brand renaissance at Olive Garden is  clearly taking hold as you see improvement in [the sales growth] trend," stated Bradford Richmond, CFO of Darden Restaurants (NYSE:DRI). In his statement, he was referring to company's earnings presentation back in June, which showed the first three weeks of that month posting flat same- store sales for Olive Garden, which was better than the negative growth the chain has seen for several quarters. He attributed this improvement to the new branding efforts, but given the very short time frame is it possible that he's jumping the gun?

What trend -- three weeks?
Without question having flat same-store sales is better than declines, even if for just three weeks. However, you don't have to look very far back to see that Darden Restaurants reports monthly Olive Garden figures that are all over the map.

In October, they were basically flat at a 0.1% decline. November saw a 1.5% rise. Then the cold brutal winter hit, which Darden Restaurants blamed as a headwind; so of course December, January, and February saw declines of 10.5%, 2%, and 2.6%, respectively.

That brings us to the calendar fourth quarter for the period ended on May 25. Same-store sales actually worsened in March with a 4.4% drop, and April and May weren't much better with 2.6% and 3.3% declines, respectively. So the "trend" is only three weeks long.

Aboutus
Olive Garden.  
Source:  Darden Restaurants

However, even that trend is questionable
Let's even ignore the 1.7% price inflation that Darden Restaurants slapped on the Olive Garden menu. June's flat same-store sales are up against a month that last year had a 1.9% decline. That makes June of this year merely equally as bad. I'm not sure that equally as bad but not worse is much of an achievement.

Next, Richmond during the question and answer session revealed that bad weather and other temporary issues such as promotional transition problems continued to plague the company in March, April, and even into the first week of May.

It all got cleared up in June. Should it really be any surprise then that June was improved when compared to the problem months? It seems like a stretch to point to those numbers alone as evidence of the brand renaissance improving the sales trend.

D Parties To Go Dozen Breadsticks Dpv

Source: Darden Restaurants

What suddenly changed during those three weeks anyway?
Darden Restaurants issued an update press release on July 8. It reminded you that the brand renaissance was been occurring over the last year. It read, "The latest phase of changes -- from a new logo to newly designed restaurants -- serve as strong signals to guests that Olive Garden is bringing new things to the table."

Well, the new design is a gradual process that didn't suddenly occur over three weeks. Call me a skeptic, but I have trouble believing that the new logo is starting to cause a new stampede of guests into the doors. The new logo on restaurants is only occurring as fast as the remodels.

Foolish final thoughts
Longer term Darden Restaurants may very well get Olive Garden back to rapid growth mode again, but it's far too premature to declare victory from three weeks of data that was an easy comparison; plus the environment improved companywide.

Show me three months instead of three weeks of improving sales. Then we may have some better evidence of something positive going on with the brand. Until then, tread cautiously before making a bet on Darden Restaurants on the basis of prematurely assuming a long-term turnaround in Olive Garden is unfolding.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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