Investors in casual-dining-chain operator Darden Restaurants
While Darden's Italian-themed Olive Garden chain delivered same-store sales growth of between 4% and 5%, increased guest traffic and improved pricing helped results. That's down from last year's 8% to 9% growth, but it's still positive. At the Red Lobster chain, however, "comps" fell 8% to 9%: The average check ticked downward somewhat, while guest count dropped perhaps as much as 10%. A year ago the company saw same-stores sales fall no more than 3% in January.
This is a familiar tale for Darden investors: Olive Garden has generally been a strong performer recently, while Red Lobster has struggled. But there were signs of life at the seafood lover's standby to close out 2004: Strong guest counts at Red Lobster led to big same-store sales gains at the chain in October, November, and December. (That doesn't correspond with the company's fiscal quarters: fiscal Q2 ended Nov. 28.)
What's troubling for Darden investors and management is that they know what's going on. To juice store traffic and sales, all the company needs to do is run a high-profile advertising campaign in which the company announces "open season" -- or, put another way, all-you-can-eat -- on a desirable menu item. In late 2004 it was shrimp; in summer 2003 it was crab legs.
Such promotions boost the top line, but they cost money to advertise and threaten margins: People will gladly come eat all they can, but only when it's the good stuff they'd likely buy anyway. (You don't see many people rushing to "All-the-Squirrel-You-Can-Eat" nights, at least not in most parts of the country.) And such promotions naturally lead to diners eating large portions that are wasteful if they don't lead to repeat business.
Darden has figured out how to post a short-term fix, but the long-term solution has been more elusive for this store concept. A story I remember my dad telling me calls to mind one they probably shouldn't try. At a restaurant, just opened, that he visited in the 1960s, an odd miscommunication led to his group being served unlimited Lobster Thermidor, until the manager suddenly realized the daily special was bankrupting the joint.
I have to admit: That would get me in the door -- and probably more than once to boot.
Fool contributor Dave Marino-Nachison has eaten squirrel, but he doesn't own shares of Darden.
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