Mamma Mia! Olive Garden Is Cool Again?

By Markets Fool.com

Image source: Olive Garden.

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Don't look now, but that casual dining chain that you and your friends often snicker about is holding up pretty well in this so-called "restaurant recession." Shares of Olive Garden parentDarden Restaurants(NYSE: DRI)are back in Mr. Market's favor. Another analyst is waxing kindly on the stock this week, with Brian Vaccaro at Raymond James upgrading Darden on Tuesday.

Vaccaro is boosting his call on the stock from underperform to market perform. This may seem like a ho-hum neutral rating, but like a panda cub growing up, this is a welcome bear conversion.

Vaccaro is basing the move on valuation, notable only because Darden is actually trading closer to the all-time high it set in June than the 52-week low it scored a year ago. The analyst feels the downside is limited here in part because a recent shelf offering opens the door for it to become more aggressive with its share buybacks. Darden's long-term framework calls for $100 million to $200 million in annual stock repurchases, but it has already bought back $196 million of its stock in its fiscal first quarter alone. Darden's board also authorized an additional $500 million in share buybacks.

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Olive Garden and Red Lobster seemed to be holding Darden back a couple of years ago. The two chains were struggling, holding back smaller concepts that were growing a lot faster. Darden went on to sell its Red Lobster seafood chain, and an activist-fueled boardroom shakeup is tweaking the way it does business at Olive Garden.

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Things seem to be working, and the turnaround is sparked by the one chain activists derided for giving away too many breadsticks and dousing its family-style salad with too much dressing. Olive Garden has been given new life under new management. Comps rose 2% in its latest quarter, 410 basis points better than the casual dining industry average that's mired in negative comps as folks stay away from many traditional eateries.Comps have now clocked in with positive results for eight consecutive quarters at Olive Garden, and that's important since it's accounting for more than half of Darden's revenue.

Olive Garden was often the butt of jokes, but you set yourself up for that when you're the mass-market leader and push out hokey marketing mantras playing off your product as authentic Italian and your staff as family. Darden's taking Olive Garden in new directions. It has introduced unique menu items including Italian pot pies and pepperoni fettuccini that just aren't being offered anywhere else. It's also trying to appeal to millennials with creative marketing campaigns that have sometimes gone viral. I can't be the only one shaking my head at the Never Ending Pasta Pass that Darden rolls out this time of year, but it's undeniably providing free or nearly free publicity without denting its store-level performance.

Darden's also been pushing the takeout component at Olive Garden, something that's important since it can score an incremental sale even when the restaurant is otherwise crowded. To-go orders have risen 20% over the past year, and up a sharp 50% over the past three years.

With Olive Garden now two years into its impressive streak of positive comps at a time when many of its peers are sputtering, the chain is cool again. With Darden stock ringing up analyst accolades and paying out a beefy 3.6% dividend yield, it's fair to say that the stock is cool again, too.

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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.