In late 2014, a struggling Darden Restaurants Inc. (DRI, Financial) was taken over by activist investment fund Starboard Value in a coup that swept out the old guard. The new management started by criticising the operations and management of the chain restaurants-owning company in a 294-page report. It would seem that their criticism and overhaul paid off as Friday morning’s quarterly earnings report showed a 7% growth in sales of continuing establishments from the previous year’s quarter to stand at $1.73 billion. Adjusted earnings jumped by 39%, besting analysts’ predictions of $0.84 profit per share.
“We delivered solid improvement in our financial results this quarter thanks to the hard work our teams are doing to grow same-restaurant sales and control costs,” CEO Gene Lee said in a statement issued by the company. “Our strategy of getting back to basics and elevating the food, service, and atmosphere in our restaurants in order to deliver the best possible guest experience is driving these sales and profitability improvements. I'm proud of the increased engagement and effort of our teams and the momentum we have created, but we still have progress to make.”
The earnings published by the company show a 3% growth in total sales of $957 million at the Olive Garden restaurant, the Italian food chain, and 11.4% growth in total sales of $404 million at LongHorn Steakhouse, the specialty steak restaurant, for the quarter ended January 2015.
Of the 1,528 locations Darden owns in the US, 845 are Olive Garden restaurants. Quarterly sales at the wavering restaurant increased by 2.2% at locations that have an established reputation. Same-restaurant sales at Darden’s six other chain restaurants rose by numbers between 3.2% (Bahama Breeze, Caribbean-themed restaurant) at the lower end, to 9.6% (LongHorn Steakhouse) at the higher extreme. Olive Garden witnessed miniscule sales growth of 0.5% in the previous quarter, making this the second time in five years that the restaurant chain has witnessed back-to-back quarters of sales growth. But comparable sales in the same quarter last year fell by 5.4%, after falling 4.1% in 2013. Competition from fast food chains that do it differently, such as Chipotle Mexican Grill, Inc. (CMG, Financial), inefficient operation and sales strategies and a dwindling customer base brought on by the economic downturn, were all working against the Italian restaurant chain. How did it work things out?
Eating out versus take out
Speculation by experts points at an improvement in sales strategy that prompted customers to order more sides such as alcohol and dessert. Incidentally, when Starboard took over some of their critique of Olive Garden’s operations included the fact that the restaurants were unable to sell enough alcohol and servers were unnecessarily giving too much bread away. There is also some effort to speed up service.
Darden isn’t alone in the industry to post higher earnings from sales. DineEquity Inc (DIN, Financial) also posted a 2.8% increase in sales at established restaurants in the quarter ended January 31. The Chili’s chain, owned and operated by Brinker International, Inc. (EAT, Financial), also reported a sales increase by 4% in the most recent quarter. A trend that can be inferred from these earnings is that customers are spending more. For over a year now, Olive Garden has been steadily losing customers. It is the loosening of purse strings by existing customers and effective sales strategies that are assisting this uncharacteristic growth.
Management credit
Industry experts are playing it cautious by claiming that it is too soon to credit these unexpected earnings to the new management at Darden. Despite the fact that operating profit margins went from 20.6% in the same quarter last year to 23% in this last quarter (after new management took over), Starboard Vale isn’t making the right moves yet. Marketing budget at Olive Garden has been slashed, while restaurant traffic is falling steadily. Pushing its take-out menu and making better sales and marketing decisions might be the way forward, in order to sustain earnings report such as the recent one.
