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Babysitters and Burgers: What Will Olive Garden Do Next?

By Dan Moskowitz – Feb 16, 2014 at 8:04AM

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Sometimes crazy works. Is this one of those cases? Or are investors paying too much attention to these initiatives instead of focusing on the big picture for Olive Garden?

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 (DIN 0.71%) 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 (EAT -0.17%) 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.

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. 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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Stocks Mentioned

Dine Brands Global Stock Quote
Dine Brands Global
$73.60 (0.71%) $0.52
Darden Restaurants Stock Quote
Darden Restaurants
$144.39 (-0.39%) $0.57
Brinker International Stock Quote
Brinker International
$33.03 (-0.17%) $0.06

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