Source: Olive Garden.
The high fives and "I told you so"s may be flying atDarden Restaurantsthese days, but it's still too early to give the activists that took over the casual dining giant late last year the accolades that the market thinks they deserve.
Yes, Darden posted better-than-expected quarterly results on Friday morning. Sales from continuing operations rose 7% to $1.73 billion from the prior fiscal year's quarter, with adjusted earnings soaring 39% to $0.99 a share. Analysts were only holding out for a profit of $0.84 a share, making this the third quarter in a row that Darden exceeded Wall Street's bottom-line expectations.
However, looking closer at the numbers, one finds that Darden's flagship chain continues to show some pressure points.
For starters, the 2.2% increase in comparable-restaurant sales at Olive Garden makes it the weakest of Darden's seven concepts. That's a pretty big deal since Olive Garden accounts for 845 -- or 55% -- of Darden's 1,528 locations. There may be nothing inherently wrong with merely keeping pace with inflation, but the performance there is a sharp contrast to the comps that popped 3.2% to 9.6% higher at Darden's six other chains.
We're also continuing to see negative traffic trends at Olive Garden. Year-over-year restaurant traffic at the average location declined 0.8% in December, 1.1% in January, and 3% in February. Yes, February's weather was lousy, but the comparison was actually favorable through the first two months of the fiscal third quarter.
The gain in comps was the handiwork of pricing and menu mix. Folks just aren't showing up at Olive Garden the way they used to. The market may be applauding that customers are spending more and that margins are widening as new leadership improves the cost structure, but this isn't a turnaround until patrons stop defecting.
It's also important to frame that 2.2% uptick in comps in its proper perspective. Comps at Olive Garden plunged 5.4% during the prior year's fiscal third quarter, and that was after sliding 4.1% the year before that. Put another way, this holiday quarter's uptick in sales at the restaurant level makes back less than a quarter of what it had lost in the two previous years.
One can argue that it's too early to evaluate the success that Starboard Value has had since convincing investors that they needed to sweep out the old guard at Darden. It's just starting to roll up its sleeves. It has been able to boost margins at Olive Garden. Operating profit margins at Olive Garden specifically rose 240 basis points, going from 20.6% a year earlier to 23% in its latest quarter. Improving labor productivity as it nixed management layers have helped boost bottom-line results, but Darden also slashed the marketing budget at Olive Garden. With restaurant traffic continuing to slide one would think that Darden would actually be spending more money to get the word out, especially if it believes in its tweaks to the actual product.
Darden points to some impressive improvements at Olive Garden. Takeout sales rose 22% during the quarter, and a test of restaurant remodels has resulted in a spike in comps at those 13 Olive Garden locations. However, until it starts increasing the total number of customers hitting up the typical Olive Garden it may be premature to be celebrating the stock hitting all-time highs. The stock was up about 3% by 9:55 a.m., trading at $66.96 per share.
The article Olive Garden Is Still Holding Darden Restaurants, Inc. Back originally appeared on Fool.com.
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