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Olive Garden Needs More Than a Breadstick Sandwich

By Rick Munarriz - May 13, 2015 at 2:20PM

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Having a meatball or chicken parmesan sub served on an Olive Garden breadstick sounds tasty, but Darden's chain still has a long way to go before getting it right.

Source: Olive Garden.

Something new is coming to Olive Garden next month. The casual-dining chain is introducing a new line of sandwiches on June 1, using its signature breadsticks as the buns.

The new sandwiches will come in chicken parmesan and meatball varieties. They'll be served with fries. Diners will also be getting unlimited breadsticks, as they do with every other entree choice at the Italian restaurant chain. 

The irony is also complimentary. The activists leading the charge at Olive Garden parent Darden Restaurants (DRI -5.60%) wrestled control of the company late last year after a nine-month proxy fight, and one of Starboard Value's knocks was that Olive Garden was serving too many breadsticks to seated patrons.

It's not as if Jeffrey Smith -- who is now Darden's chairman -- and his fellow activists had anything against the addictive sticks of baked dough. Smith was on Wall Street Week this past weekend announcing the new sandwiches, while also pointing out that getting the chain to scale back on how many breadsticks it initially served was simply a matter of discipline.    

Shareholders haven't minded the power shift at Darden. The stock has been moving higher since last year's proxy battle, hitting a new all-time high just a few weeks ago. However, Darden's flagship concept is still a long way from being considered a successful turnaround. The novelty of the new sandwiches could help increase traffic at the often lampooned casual-dining chain, but it probably won't be enough.

Darden, itself, is on the rebound. It posted better-than-expected quarterly results in its most recent outing, with sales and adjusted earnings from continuing operations rising 9% and 39%, respectively. 

Darden operates seven different chains. Its empire includes LongHorn, Bahama Breeze, and high-end chophouse Capital Grille. Olive Garden is, by far, the largest. More than half of the 1,528 total restaurants under Darden's watch are Olive Garden. Unfortunately for Darden, it's also the only one that's struggling with sliding traffic counts. 

Olive Garden has gone through two years of sliding guest counts. It was the weakness at Olive Garden that opened the door for Starboard Value to take the reins last October. Even in its latest quarter, when the market applauded the 2.2% increase in comparable-restaurant sales at the chain, it masked a bigger problem in terms of traffic.

Year-over-year restaurant traffic at the average location declined in all three periods that made up the fiscal quarter -- down 0.8% in December, 1.1% in January, and 3% in February. Comps were positive as a result of higher pricing and menu mix, but folks still aren't coming back to the most important chain at Darden.

Even the 2.2% uptick in comps isn't something to cheer about. It follows a 5.4% drop the year before, and a 4.1% decline the year before.

The good news for Olive Garden is that it's not relying solely on breadstick sandwiches to save the day. It's been promoting its carryout offerings, and takeout sales rose 22% in its latest quarter. It has also seen positive traffic trends at test restaurants that it recently remodeled.

The breadstick sandwiches will draw in the curious, but then it will be up to Darden to make sure that they keep coming back for more.

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