Fool on Call: Darden's Extreme Makeover?

Darden Restaurants (NYSE: DRI  ) has been on quite a run since 1995, as my Foolish colleague Ryan Fuhrmann noted. The restaurateur kept the momentum going with its top and bottom lines contributing nicely in the second quarter. Can the company keep up the pace? Its quarterly earnings conference call is a great place to begin looking for answers.

In this edition of Fool on Call, we'll look at the initiatives the company plans to implement in order to drive growth going forward. The discussion will center on these areas:

  • Olive Garden is steady as she goes.
  • Red Lobster gets tweaked to ward off competition.
  • Smokey Bones, on the other hand, is going for an extreme makeover ... or is it?

No need to change a winning recipe
President and COO Drew Madsen took us through some of the growth initiatives for each of its major brands. Given Olive Garden's long-term success, it's no surprise that it will receive the fewest tweaks.

In the most recent quarter, sales from this brand increased 7.1% compared with the same period a year ago. This increase was made possible by a combination of new restaurant openings, as well as steady revenue growth from those sites open more than a year.

Looking ahead, promotions like the popular Never Ending Pasta Bowl will continue to drive customer traffic. Additionally, the brand has opened three prototype restaurants with a Tuscan farmhouse feel. Olive Garden will open 30 to 35 new sites in 2007, doubling its new unit production in fiscal 2006.

One doesn't get the sense that much will change with the brand. And given its history of success, why should it? The competition in this category is certainly more heated than it was a decade ago, with Brinker International's (NYSE: EAT  ) Macaroni Grill and OSI Restaurants' (NYSE: OSI  ) Carrabba's Italian Grill offering compelling options. But Olive Garden keeps making just enough minor adjustments to keep customers coming back, and management remains optimistic that this strategy will continue working.

Red Lobster going upscale?
Red Lobster, on the other hand, is taking serious notes over the success of OSI Restaurants' other concept called Bonefish Grill. Offering the freshest fish possible is one of Bonefish's major attributes, and it's a reason that customers have been drawn to the brand. After analyzing Darden's conference call, I get the sense that management doesn't want to see its Red Lobster brand get outflanked in the "fresh" category.

In October, Red Lobster launched a new initiative to address the image that many have of it -- that it serves primarily frozen seafood. In an effort to change this image, it unveiled a new menu design featuring several new menu items. Perhaps even more important than the menu itself is what is inserted along with the menu. Twice a day, each restaurant provides an updated insert in each menu that highlights five to seven of its freshest seafood options. Additionally, the inserts showcase the variety of ways the fish can be prepared.

In the question-and-answer portion of the call, management admitted it's too early at this point to declare a victory with this new "freshness" initiative since it has only been employed for about six weeks. However, CEO Clarence Otis did add, "We think it's going to help Red Lobster a great deal."

Management did not elaborate further, but we also learned that in the coming quarters, Red Lobster plans to employ additional steps toward refreshing its image. No additional detail is needed, as it is clear that Bonefish Grill is a rising threat, and Red Lobster is going to do its best to protect its turf. The emphasis on freshness and preparation appear to be the right moves. The only question is whether these steps are too little too late.

Burying Smokey Bones?
In the analysis of Darden's FY2006 fourth-quarter conference call, we got a sense that dramatic changes were being planned for the Smokey Bones concept -- a brand that has been a major disappointment so far. Much more detail was unveiled in the latest call.

Darden is looking to broaden the appeal of the brand by moving away from its current barbeque-centric image. The company is testing a replacement brand called Rocky River Grill House. The first site was opened a few weeks in Cuyahoga Falls, Ohio.

The idea is to offer a "getaway" place in the "spirit of the great outdoors." From the exterior look of a lodge to the interior's usage of fireplaces and natural rock decor, Darden is hopeful that customers will be attracted to the rustic look.

Complementing the store layout is the menu, which will feature a variety of fire-grilled meats. During the Q&A portion of the call, it was revealed that the average check price is expected to be higher for the new concept since the quality of meats has improved. Management is "pleased" with its sales performance so far, but it also realizes it has "much to learn and much more to do."

Another important revelation from the Q&A is that Smokey Bones may not be buried entirely. It sounds like management is planning to keep those Smokey Bones units that are working, and for those that aren't, these sites will be prime candidates for a Rocky River extreme makeover.

A tough balancing act
Keeping Olive Garden steady and emphasizing "freshness" and preparation at Red Lobster both look like the right moves. I'm not as sold over Darden's strategy with Smokey Bones, however.

My concern here is whether Darden is trying to balance too much as it seeks to improve Smokey Bones, all the while developing an entirely new brand. On top of this, management must then decide which Smokey Bones sites get to stay and which ones are scheduled for an extreme makeover. It sounds like an extreme headache to me.

Investors will want to monitor both the improvements to Smokey Bones and the continued development of Rocky River. Can management maximize both concepts at the same time?

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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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