Analysts approve of Darden's plan to stabilize Olive Garden sales

Darden Restaurants Inc.’s plan to stabilize same-store sales at Olive Garden and its impending sale of the Red Lobster chain has drawn generally favorable nods from analysts.

The Orlando, Fla.-based casual-dining company has launched a re-branding program for its 837-unit Olive Garden chain, as it heads toward the $2.1 billion sale of its 706-unit Red Lobster brand to Golden Gate Capital.

While Darden said Olive Garden’s same store sales slipped 3.5 percent in the May 25-ended fourth quarter, it signaled that those sales were improving in the first few weeks of the first quarter. Red Lobster had a 5.6-percent decline in same-store sales in the fourth quarter.

Bryan C. Elliott, an analyst with Raymond James & Associates Inc., said his team was “encouraged by early signs of comp stability at the core Olive Garden concept (June flat, first non-negative since May ’13), which could reflect early signs of traction on management’s broad brand turnaround efforts.”

Elliott also said a plan by activist investor Starboard Value L.P., which owns 6.2 percent of Darden’s stock, to replace all of its 12 of the company’s directors “could be a near-term catalyst” for further changes at Darden.

Mark Kalinowski, analyst with Janney Capital Markets, maintained a buy rating on Darden’s stock, noting that despite significant ongoing challenges, there was “potential for activists to (directly or indirectly) unlock value.”

Lynne Collier, analyst with Sterne Agee, said in a note that she saw some positive indictors in the stabilization of same-store sales at Olive Garden. She noted that June same-store sales were tracking to be the best since November 2013.

Collier said “management noted that same-store sales are trending flat at Olive Garden in 1Q15 to date. However, we noted that some of the traffic improvement was at the expense of checks as guests were trading down on the menu (negative mix).” She also said Darden was aggressively discounting during the quarter, with such offers as $10 off a purchase of $30.

Darden’s commodity outlook is more favorable with the sale of Red Lobster, Collier added.

Darden’s “spend on seafood will decrease from approximately 25 percent of food costs to approximately 12 percent,” she noted. “The company's inflation expectations are modest, assuming a 2 percent to 3 percent increase in food costs in FY15.

“Management expects most commodity prices to increase in the low single-digit range but believes that beef and seafood will increase at a faster pace,” she wrote. “Overall, we are not expecting commodities to materially pressure earnings in FY15, and we are estimating [about] 10 bps of year-over-year leverage in cost of sales due to lower reliance on seafood after the sale of Red Lobster and low single-digit same-store sales growth.”

David Palmer, an analyst with RBC Capital Markets, said it was too early to say Olive Garden was in a turnaround.

“New menus launched at the beginning of F4Q/14 seemed to have a minimal effect on trends as Olive Garden underperformed the industry by more than 200 [basis points] during the quarter,” Palmer noted.

“Although we remain cautious,” Palmer added, “we believe fundamental improvement at Olive Garden (about 60 percent of the "New Darden" revenue) can occur slowly with a shift to digital/targeted marketing, reinvestment in food value, and reimaging, all of which appear to be in progress under the new strategic plan.”

Palmer said many questions remain about how the company will meet its targets of “low- to mid-teens operating growth” against a backdrop of general casual-dining market pressure.

Palmer also noted that Darden’s marketing message faced challenges.

“Darden's TV advertising is seemingly generating questionable returns as Millennials turn away from live television viewing,” Palmer wrote.

Contact Ron Ruggless at [email protected].
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