We've had a moment to digest the latest quarterly results from Darden Restaurants (NYSE:DRI). The numbers were not all that tasty, but if you've come back for seconds anyway, we have a little treat for you.
"Fool on Call" provides pertinent information relating to a company's quarterly earnings conference call. In Darden's fourth-quarter call, we were able to glean some good material to help us develop a fuller picture of how the restaurant operator plans to keep customer traffic brisk and deliver strong sales. Now we'll look at the two major segments of Darden's business: Olive Garden and Red Lobster.
In bloom
President and Chief Operating Officer Drew Madsen pointed out that in fiscal 2007, Olive Garden outperformed the rest of the casual dining segment in terms of same-store sales by more than four percentage points. What makes this even more impressive is that this is the 51st consecutive quarter of positive comps for the brand. After spending much time analyzing the restaurant industry, I can tell you that this is no small feat.
Given the success of this concept, it seems fitting that Darden would want to accelerate its growth opportunities. That's exactly what Madsen detailed in the call. Olive Garden opened 19 new restaurants two years ago, and this past year it upped the number of new openings to 32. Now, in fiscal 2008, management expects the company to open 40 new Olive Gardens.
Opening more and more new Olive Gardens is important because historically, it's the company's top-performing concept. With the expected new unit growth near 7%, on top of its typical low-single digit comps growth, Darden could drive almost 10% sales growth in fiscal 2008, just from Olive Garden.
In the call, management estimated that the U.S. market can hold as many as 800 to 900 Olive Gardens. With a little more than 600 in operation now, that amounts to a 33% to 50% growth opportunity, suggesting considerable upside to potential investors. Even more enticing, much of the time these estimates are conservative, based on my experience. Cheesecake Factory (NASDAQ:CAKE), for instance, recently realized that by developing smaller restaurants, the market could hold more than the original projection of 200 units in the U.S. market. So, as it stands now, Darden sees the opportunity for as many as 900 Olive Gardens, but I would not be surprised in the least to see the company ultimately surpass that figure.
Overall, the plan for Olive Garden is to keep opening more units while maintaining healthy sales from older sites. Two ways that Olive Garden plans to keep customer traffic brisk at existing restaurants is by continuing its focus on strong advertising and by keeping the menu fresh. For example, the restaurant is promoting two new dishes -- a five-cheese tortellini with shrimp and a five-cheese tortellini with sausage. Management said there has been "solid" customer feedback in June for the new entrees.
Reviving Red Lobster
Fourth-quarter sales for Red Lobster declined 1.8% from the comparable period a year ago, primarily because of a same-store sales decrease of 2.2%. Despite the progress Red Lobster made in fiscal 2007, it's clear that the concept still has its work cut out.
Since October, the company has worked hard to get customers back by using a fresh catch menu that is printed twice daily at the restaurants. Look for a new advertising campaign in July that will place greater emphasis on its fresh fish. The tagline will be, "Come see what's fresh today!"
In conjunction with the ad campaign, Red Lobster is digging deep into its culinary library to introduce a couple of new dishes this summer, including citrus-rum scallops and fire-grilled lobster and shrimp. I'm hungry!
The other big news coming out of Red Lobster's camp is a new restaurant prototype. The company went back to the drawing board to design a new restaurant that reflects the look of a "seaside escape" in coastal Maine. Already, two restaurants have opened with this format. Madsen reports a positive response from old and new customers alike. In addition to the new stores with the new design, in fiscal 2008, Red Lobster will test a remodel design that is in the spirit of coastal Maine. Eventually, it's anticipated that this remodel will be used for the company's older restaurants.
Overall, I like the game plan that Red Lobster has come up with. With the emergence of other attractive fish-oriented concepts like Bonefish Grill from OSI Restaurant Partners (NYSE:OSI), the brand is facing competition like it has never faced before. In updating Red Lobster's menu with an emphasis on freshness and opening restaurants that have greater appeal to customers, the company should be able to build on the progress it made in fiscal 2007.
Tasty prospects
The casual dining segment is filled to the brim with competitors, including heavyweights like Brinker International (NYSE:EAT) and Applebee's (NASDAQ:APPB). But no other restaurateur has been able to attack two important food types -- fish and Italian -- with such success as Darden, and that includes Landry's Restaurants (NYSE:LNY) and its historically underperforming brands.
The competition is as intense as ever, but with new menus and restaurants with a fresh look, I see a Darden that is well-prepared to deliver solid results.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Fool has a disclosure policy.
