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Olive Garden Has a Crisis, and It Wasn't Caused by the Weather

By John Maxfield – Mar 5, 2014 at 11:59AM

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On Monday, Olive Garden reported its worst quarterly performance in more than two decades. Motley Fool contributor John Maxfield digs into what caused the decline at the pride and joy of Darden Restaurants.

Source: Darden Restaurants.

On Monday, Olive Garden reported its worst quarterly performance in more than two decades -- and perhaps in its entire corporate existence. According to a press release issued by parent company Darden Restaurants (DRI 0.13%), same-store sales at the Italian eatery fell by 5.4% in the most recent quarter compared to the year-ago period.

Why were the results so bad? If the company is to be believed, the culprit was weather. "During our fiscal third quarter, underlying conditions in our industry continue to be challenging," said Darden CEO Clarence Otis. "And on top of that, both the industry and our brands were hit with unusually severe winter weather in much of the country."

To be clear, Olive Garden isn't the only company -- or, for that matter, the only industry -- blaming the elements for recent lackluster performance.

Executives at Ford said the same thing on Monday, estimating that domestic auto sales declined by 6% in February due to "severe winter weather that disrupted some parts shipments and kept buyers away from dealers in many parts of the country." And, as I've recently discussed, much has been made of the substantial downturn in the housing market during the last few months, which, too, has been attributed to the environment.

At least when it comes to Olive Garden, however, there are two problems with this. In the first case, the company offered the same explanation last year. According to a press release issued on Feb. 22, 2013 (emphasis added): "The Company also estimates that, compared to the prior year, blended U.S. same-restaurant sales for the third quarter for Olive Garden, Red Lobster and LongHorn Steakhouse will be approximately -4.5% and that this result was adversely affected by approximately 90 basis points due to more severe winter weather this year than last year."

In other words, it's not like Olive Garden's performance in the most recent quarter was being compared to results from a period of unseasonably mild weather last year. Both quarters experienced the same issue, rendering the comparison arguably more accurate than had the weather been great this year. And along these same lines, it's worth noting that this year's 5.4% contraction in same-store sales is particularly ominous when you consider it was up against a 4.1% contraction last year. Together, that adds up to a nearly 10% plunge during the last two years alone!

The second problem is that blaming the weather masks a more fundamental problem at the Italian-themed chain. That is, falling same-store sales isn't a recent phenomenon at Olive Garden -- or, rather, it is, but just not as recent as this past quarter. This is illustrated in the figure above, which charts the chain's quarterly same-store sales performance going back to the beginning of 2008. As you can see, during the last 11 quarters, Olive Garden's comps have been positive only three times.

At the end of the day, in turn, the problem isn't the weather. That's a pretext. It's a halfhearted excuse offered by a company that's fighting for its life against fast-casual upstarts like Chipotle Mexican Grill and Panera Bread. Can Olive Garden ultimately compete against these young whippersnappers? Perhaps. In the meantime, however, there's no use in blaming the weather when the true root cause lies, rather, in the mirror.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, Ford, and Panera Bread. 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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