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

What happened?

Restaurant chain operator Darden Restaurants 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.

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.

Does it matter?

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.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

The article Instant Analysis: Does Olive Garden's Comps Growth Mean Worst Is Behind Darden Restaurants Inc.? originally appeared on

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . 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 .

Copyright © 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More