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Instant Analysis: Does Olive Garden's Comps Growth Mean Worst Is Behind Darden Restaurants Inc.?

By Rich Duprey – Dec 18, 2015 at 6:43PM

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The restaurant operator saw across-the-board improvements at all of its restaurants, but the Italian eatery isn't out of the woods yet.

What happened?
Restaurant chain operator Darden Restaurants (DRI 0.58%) beat analyst estimates for profits in its fiscal second quarter, reported today, but even though it came up short on revenues, the various strategic initiatives it implemented after activist investors ousted the entire board of directors last year seem to be paying off.

In particular, while all of its restaurant concepts gained in the quarter, the advances made at Darden's Olive Garden Italian restaurant suggest the turnaround is gaining traction.

Does it matter?
The competing visions of management and investors collided when the former chose to sell off the Red Lobster seafood chain rather than repair it as hedge funds Starboard Value and Barington Capital wanted. It culminated in a proxy fight that saw Darden's entire board defeated and Starboard assuming control of the restaurant operator.

While the first order of business was fixing what was wrong at Olive Garden, given its importance to the company -- it generates well more than half its revenues and three times more profit than any other restaurant in the fold -- the initiatives also included focusing on the core menu at Longhorn Steakhouse, improving marketing, and enhancing customer relationships, all of which seem to be paying off.

Comparable-store sales, an important retail metric because it strips out growth achieved simply by opening new locations, saw across-the-board improvements. On a comparable calendar basis (there was an extra selling week this year in the quarter compared to last year), comps rose 2.9% at Olive Garden, 3.6% at Longhorn, and between 1% and 6% at Darden's specialty restaurants.

The new management team also sought to restructure the restaurant operator. In addition to making improvements at the various chains, it implemented a tough cost-cutting program and last month completed the spinoff of some 430 restaurants into the Four Corners Property Trust (NYSE: FCPT) real estate investment trust.

While the improvements are noteworthy, there remains reason for caution. The REIT spinoff is predicated on Olive Garden's success, and while the chain has been able to post higher comps, that's solely been a function of its raising prices and product mix. The Italian restaurant is still reporting falling traffic, even with the extra week included (on the comparable calendar basis traffic was higher, however).

What it means is, Darden Restaurants is moving in the right direction, but the Olive Garden transformation is not yet complete. The restaurant operator is on more solid financial footing, though, which will help fund the 14% increase in its quarterly dividend, to $0.50 per share.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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