Olive Garden Is Still a Problem at Darden Restaurants, Inc.

By Markets Fool.com

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Source: Olive Garden.

Shares ofDarden Restaurants hit new all-time highs last week -- on their highest trading volume of the year -- after the company posted better-than-expected quarterly results. It was certainly a solid report on the surface. Revenue climbed nearly 14% since the prior year's quarter, and adjusted earnings doubled to $1.08 a share.

Wall Street was only holding out for a profit of $0.98 a share, but that's not much of a surprise. Darden has blown through analyst profit targets consistently over the past year. It should be pointed out that this fiscal quarter had an extra week when pitted against the prior period. Back that out and sales rose just 6%. However, it was still a decent showing on the top line and an even better showing on the bottom line.

There was also the well-received news that Darden would be milking its real estate portfolio, spinning off some of its holdings as a REIT in a move that would help it trim down its debt. So, yes, it was generally a pretty robust report for the once-struggling multiconcept operator.

However, the media was ablaze last week with headlines proclaiming that Olive Garden -- Darden's largest chain -- is back.

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  • "Olive Garden sales up as gas prices and discounts fall"-- Associated Press
  • "Olive Garden cooks up 1st annual sales jump since fiscal 2011" --American City Business Journals
  • "Takeout orders powering Olive Garden's growth" -- New York Post
  • "Olive Garden sales hotter than its breadsticks" -- CNNMoney

Reading these headlines would make it seem as if the oft-lampooned Italian casual dining chain has completed the turnaround. If so, that would have happened in record time since hedge fund activists succeeded in shaking up the boardroom late last year by arguing that Olive Garden was a mismanaged mess.

Now, none of these headlines are wrong. Sales are up at Olive Garden, and a spike in takeout orders has helped. However, let's not make the flawed assumption that customers are coming back to the chain. They're not.

Darden owns several concepts including LongHorn, Capital Grille, and Yard House, but Olive Garden accounted for 55% of total restaurant sales in the just-completed fiscal year 2015. Comps at Olive Garden rose at a hearty 3.4% clip in the fiscal fourth quarter, and that's the chain's best showing in years. However, all of that growth -- and then some -- came from pricing and menu mix increase. Customer counts actually continue to decline at Olive Garden.

Same-restaurant traffic at Olive Garden rose 0.6% in March, only to fall by 2.4% in April and a steeper 2.7% in May. This is actually something that the market saw play out during the fiscal third quarter when comps rose at Olive Garden despite posting negative year-over-year traffic comps through December, January, and February.

This isn't horrible news. Folks are paying more to eat at Olive Garden, and that's been more than enough to offset the grim reality that fewer people are actually eating at Olive Garden. Starboard Value is delivering on some if not most of the changes it championed in convincing shareholders to boot the old regime. However, until we actually see foot traffic at our local Olive Gardens start to pick up, it's not fair to call this a turnaround. Darden is merely finding a way to make more with less at its flagship chain. That's fine for financial purposes, but the Olive Garden brand is still not back in the hearts and mouths of consumers.

The article Olive Garden Is Still a Problem at Darden Restaurants, Inc. originally appeared on Fool.com.

Rick Munarriz 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.