Is a Turnaround Finally Starting to Happen at Olive Garden?

Olive Garden is starting to show some signs of a turnaround. Unfortunately, it might be too little, too late to save the job of Darden Restaurants' CEO.

Mark Yagalla
Mark Yagalla
Jul 9, 2014 at 9:00AM
Consumer Goods

Now that Darden Restaurants (NYSE:DRI) is selling Red Lobster, there's even more pressure on executives to turn around the struggling Olive Garden chain. CEO Clarence Otis has been working on a turnaround for quite some time, but unfortunately the results did not show up in Darden's latest earnings report. Same-store sales at Olive Garden fell 3.5% in the latest quarter.

Source: Darden Restaurants.

However, things are looking better for Darden and Olive Garden in the current quarter. Same-store sales for June were flat at Olive Garden, and this was the first non-negative read since May of last year. This is good news for Darden shareholders and a possible sign that a turnaround is actually taking place at Olive Garden.

Source: Olive Garden.

A turnaround at Olive Garden would take a lot of pressure off CEO Clarence Otis and help him keep his job at this year's annual meeting. Activist investor Starboard Value is upset with the terms of the Red Lobster sale and has nominated its own slate of directors for shareholders to vote on. So is the turnaround finally happening at Olive Garden? Also, what does this mean for Ignite Restaurant Group (NASDAQ:IRG) and its Romano's Macaroni Grill?

What's behind the new efforts at Olive Garden?
Darden Restaurants is looking to implement what it is calling a "brand renaissance" at Olive Garden. There's several parts to the plan. First, Darden is looking to increase Olive Garden's takeout business. To-go orders account for about 8% of Olive Garden's sales. The company has tested online ordering in certain markets and saw sales increase by an average of 10% at participating restaurants. Darden plans to rollout online ordering to all Olive Garden restaurants by the end of August. Later, Darden is looking to add tabletop tablets like Chili's and Applebee's have done.

Source: Getty Images via Bloomberg.

The second part of the plan is to boost Olive Garden's lunch business. The chain is testing a lunchtime guarantee to encourage guests that Olive Garden is another option for guests in a hurry. Instead of going to a fast-casual spot like Chipotle or Panera Bread, customers can get a quick sit-down lunch at Olive Garden. Olive Garden is calling this the Pronto Lunch. This lunchtime menu offers simpler recipes for Olive Garden's cooks, which makes the kitchens more efficient and helps get customers in and out the door. A big plus for a company looking to increase lunchtime sales.

The final piece of the puzzle is remodeling its restaurants. Darden just unveiled its new refurbished look at an Olive Garden in Fort Walton Beach, Florida. The makeover includes fresh colors, a new menu, more seating, and new china and flatware. It takes about eight weeks to remodel a location. The good news is that the remodel can be completed without closing the restaurant. Changes include increasing the height of the entrance door, adding Olive Garden's new logo, and an open bar. Olive Garden could use an updating since about half of its locations are still based on a non-Tuscan-farmhouse layout, which dates back to before the year 2000.

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Taking a cue from Romano's Macaroni Grill
Romano's Macaroni Grill has long been known for its open bottle of wine at the center of every table. Olive Garden is looking to boost its wine and alcohol business by training its servers on what wines to recommend. The goal is to get customers to spend more on alcohol and boost the average guest check. Romano's Macaroni Grill knows this and advertises its wine list to bring customers in. The Italian restaurant chain just finished its promotion of half-price wine by the glass or the bottle for the month of June. Romano's Macaroni Grill has wines from Italy and the U.S. on its extensive wine list, including a house wine that is exclusive to Macaroni Grill.

Source: Romano's Macaroni Grill.

Ignite Restaurant Group in the same boat as Darden
Ignite Restaurant Group has been working to turn around its struggling Italian restaurant chain as well. In the first quarter, same-store sales fell 4.1% at Macaroni Grill. Ignite's Red Lobster competitor, Joe's Crab Shack, fared even worse; its same-store sales dropped 6%. The bright spot for Ignite was its Brick House Tavern + Tap concept. Same-store sales there rose 10%. So, like Darden Restaurants, Ignite has its weak spots overshadowing its strong performer. Ignite blamed the weather for a good deal of its first-quarter weakness. This Fool will be looking for improvement when Ignite reports its second-quarter results.

Source: Ignite Restaurant Group.

Foolish final thoughts
While it's too early to tell if Darden CEO Clarence Otis has Olive Garden on firmer footing, things certainly look better now than before. The key for Darden Restaurants and its shareholders is what happens at the annual meeting in September. Will Starboard Value win, or will shareholders stick with the current board and Clarence Otis? Starboard Value has a good chance of winning since the hedge fund owns 6.2% of the company and shares have underperformed the market. Shares of Darden Restaurants are down almost 10% in the past year. Either way, signs are pointing toward a turnaround at Olive Garden. Unfortunately, for Clarence Otis, it might be too late to save his job. We'll have to see what happens in September at the annual meeting.