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Olive Garden Is Back -- but You Already Knew That

By Rick Munarriz - Apr 6, 2016 at 4:34PM

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Darden Restaurants posts quarterly results showing its sixth consecutive uptick in comps for its most important restaurant chain.

Image source: Olive Garden.

It's easy to make fun of Olive Garden, but sometimes you have to give this Italian casual-dining chain a wink of approval. Olive Garden parent Darden Restaurants (DRI -7.39%) posted quarterly results this week, checking in with healthy unit-level growth across all of its concepts. 

Olive Garden was particularly resilient. Comps rose by a hearty 6.8% since the previous year, marking the chain's biggest gain in years. It's also the sixth straight quarter of year-over-year growth in comparable-restaurant sales, seeming to validate the activist takeover of the company in late 2014. 

Most of the growth owed to an uptick in foot traffic. Guests counts rose 4.8% at the average Olive Garden, with pricing and menu mix making up the balance of the spike in comps. 

This is where activist investors thought the chain should be when they spearheaded a campaign to take ownership of the then-meandering Darden two years ago, shortly after Darden had unloaded the struggling Red Lobster chain.

Some of the shots seemed outrageous at first. The Starboard Value LP-fueled activism called Darden out for handing out too many breadsticks and wasting too much Italian dressing on its salad. The activists also called Darden out for the large menu at Olive Garden, arguing that 96 menu items are too many. 

Starboard Value won, and while it didn't implement all of the items on its long laundry list of proposed changes -- the 294-slide presentation was legendary -- it has certainly earned bragging points with the turnaround at Olive Garden. 

Investors should still be realistic here. Olive Garden had posted five consecutive quarters of negative comps, making the bar that much easier to clear for the new leadership. However, now that Olive Garden is stacking its quarterly performance against growth from a year earlier, the turnaround is starting to get impressive. 

The news wasn't all glorious out of the Darden camp. Starboard Value's Jeffrey Smith did resign as Darden's board chairman on Tuesday. Investors don't typically like when someone who helped pave the way for a revival moves on, but activist investors by their very nature don't like to tie themselves to a single situation for too long.

The turnaround will continue at Darden in general, and Olive Garden in particular. Analysts expect the recent double-digit percentage spike in earnings growth to continue through the next few quarters, and the stock's current 3% yield will reward patient investors as they wait to see how things play out. Smith may be gone to find a new feast, but there are still more breadsticks at Darden for investors to gnaw on before the turnaround opportunity is off the table.

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