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Olive Garden Finally Gets One Right

By Rick Munarriz - Sep 22, 2015 at 2:00PM

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Darden Restaurants posts quarterly results showing its largest chain finally reversing a negative traffic trend.

Source: Olive Garden.

Shares of Darden Restaurants (DRI 4.14%) opened slightly lower on Tuesday morning after posting financial results for its fiscal first quarter. 

It wasn't a bad report. Sales from continuing operations clocked in at $1.69 billion, 5.7% ahead of the prior year's fiscal first quarter, and just ahead of the $1.67 billion analysts were forecasting. Adjusted earnings more than doubled to $0.68 a share, blowing past the analysts who were targeting just $0.58 a share.

Comps were positive at all seven of its restaurant chains, and that's no small feat. Same-eatery sales have climbed 3.4% since the prior year on a collective basis.

The cherry on top -- or shall we say the olive on top of the salad -- is that Darden is boosting its bottom-line guidance for the entire fiscal year. Darden now sees earnings from continuing operations checking in between $3.15 a share to $3.30 a share, up a dime on both ends of its earlier range. 

The news is also encouraging when it comes to Olive Garden, the oft-lampooned Italian casual dining chain that had been dragging down overall performance. This was the third quarter in a row that Olive Garden had posted year-over-year growth in comps, but it was actually the first time in more than two years that restaurant traffic gains were positive. Olive Garden's two previous quarters of positive comps were the handiwork of folks paying more to eat at the chain, a combination of higher prices and positive menu mix results. Year-over-year traffic counts actually clocked in lower.

That wasn't the case this time. Boosted by a strong showing in July that was just enough to offset traffic declines in June and August, guest counts improved by 0.3% during the reporting period relative to last year's fiscal first quarter. You may not see executives high-fiving Olive Garden breadsticks with a mere 0.3% move -- a visual you probably won't be able to get our of your head now -- but at least it's finally moving in the right direction. 

This is the kind of news that would normally send a stock higher, but Darden has already been on a tear since the activist-fueled boardroom shakeout that was completed late last year. The stock has moved 43% higher over the past year, leaving the shares priced at a rich 21 times the high end of Darden's revised earnings outlook for fiscal 2016. That's a bit steep for a company growing its top line at a mere 6% clip. The bottom-line improvement has been dramatic, but that growth will moderate now that the new regime has turned things around. 

It also probably didn't help that Darden expects comps to remain positive but decelerate for the balance of fiscal 2016. As long as Olive Garden can keep its new trend of positive in-store traffic alive, Darden will be just fine. 

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