Source: Olive Garden.
Olive Garden may be showing signs of life, but the same can't be said about Darden Restaurants' (DRI -0.28%) board ahead of next Friday's critical shareholder vote.
Darden announced encouraging metrics for its flagship Italian casual dining concept on Thursday morning. Same-restaurant sales for domestic Olive Garden locations during the five-week September fiscal month that ended this past weekend rose 0.6%. That may not seem like much. It doesn't even keep pace with inflation. However, it's a welcome break for a concept that's coming off of four consecutive quarters of posting negative comps.
It's a convenient press release, issued just eight days before its annual shareholder meeting where activist investor Starboard Value LP wants to clean house in Darden's boardroom by nominating its own slate of prospective directors. That's exactly what this press release is about. Darden wasn't providing same-restaurant sales metrics before, especially when the news was bad. In the past few days it's been cranking out press releases promoting third-party perspectives that support Darden's nominees.
This may all seem desperate, especially since Starboard only has an 8.8% stake in Darden. However, Darden is also battling another convenient release -- an Institute for Policy Studies report on Wednesday -- showing that departing CEO Clarence Otis will be getting nearly $36 million in severance when he steps down later this year.
To be fair, the lion's share of that package is the $28.2 million he owns in options and stock awards. However, the headline figure is what's going to tick off investors calling for change at Darden. If Starboard thought that Olive Garden was being too generous with its breadsticks, just imagine what it has to say now about Darden being too generous with all of its dough. It also doesn't help Darden's cause that a good chunk of that calculated severance package has come as a result of the stock appreciating sharply since Otis announced his retirement this summer.
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The rebound at Olive Garden is certainly better than a negative showing, but it may not necessarily prove that the chain's turnaround strategy is paying off. If we go by its most recent quarter's results -- where Olive Garden suffered a 1.3% dip in comps but actual traffic slumped 0.9% in June, 4.3% in July, and 2.3% in August -- it's probably a safe bet that the entire gain in September was the result of higher prices. Restaurant traffic is probably still going the wrong way.
It's not easy boiling up pasta these days. All but one of Darden's six smaller concepts held up better than Olive Garden in fiscal September, but it's the Italian chain that's accounting for 57% of the revenue mix here.
Patrons are favoring fast casual, where they get the convenience of fast food but the slightly better quality of casual dining. However, it's not as if giving Olive Garden more fast casual curb appeal would help. Noodles & Co. (NDLS -0.36%) was one of last year's hottest IPOs. The fast casual pasta chain went public at $18, peaking at $50 a few weeks later. It's been hit hard in 2014, largely because its once impressive streak of positive comps has just turned negative.
It's too early to applaud Olive Garden for its positive September, and because of that it may be too late for Darden's director nominees when the proxy battle is settled in a few days.
