Can Olive Garden Save Darden Restaurants?


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The restaurant operator is placing a big bet on the Italian eatery turning around its growth prospects. Here's whether it can actually achieve that.

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Can Olive Garden Save Darden Restaurants?

  1. 1. Can Olive Garden Save Darden Restaurants?
  2. 2. Olive Garden is the biggest kid on Darden’s block • It had Q4 sales of $926 million, which accounted for 56% of Darden’s revenues from continuing operations of $1.6 billion. • Its 828 restaurants in U.S. and Canada represent 58% of restaurateur’s total locations . 56.322.9 20.8 Darden Restaurants Revenue Contribution by Concept Olive Garden Long Horn Steakhouse Specialty Group
  3. 3. Rebirth of a brand • Darden says Olive Garden chain provides foundation for all future growth • New “brand renaissance” program to enhance position with millennials and multicultural households • Will use platform for renewed same-restaurant sales growth and margin expansion • Greater emphasis placed on fresh ingredients, presented simply, with sense of Italian flair
  4. 4. But we’re in a new era of fast-casual dining • Consumers are looking for fresh ingredients, customizable menus, and pleasant atmosphere • Fast-casual chains like Chipotle Mexican Grill and Panera Bread are where growth is happening • Segment unit growth outpaced rest of industry in 2013, expanding total locations by 6% compared to 1% decline at casual, midscale, family, and fine-dining restaurants • Everyone from pizzerias to beer-and-wing joints wants to copy experience
  5. 5. That makes organic growth hard to come by • Same-restaurant sales at Olive Garden are on downward spiral – Q4 Revenues fell 2.7% – Comps fell 3.5% • Trouble exacerbated by traffic falling by similar rates -14 -12 -10 -8 -6 -4 -2 0 2 4 6 Dec11 Feb12 Apr12 Jun12 Aug12 Oct12 Dec12 Feb13 Apr13 Jun13 Aug13 Oct13 Dec13 Feb14 Apr14 Darden Restaurant Olive Garden Comps & Traffic Traffic Comps
  6. 6. Olive Garden’s competitive moat is drying up Olive Garden is still the premier Italian dining experience, with over 800 locations, but it’s spawned legions of copycats: • Bloomin’ Brands (Nasdaq: BLMN) has 241 Carrabba’s Italian Grill restaurants • Brinker International (NYSE: EAT), 45 Maggiano’s Little Italy • Ignite Restaurant Group (NYSE: IRG), 177 Romano’s Macaroni Grill That means more similar-style restaurants fighting for shrinking piece of restaurant industry’s pie
  7. 7. Mama mia! Everyone’s into the sauce! Italian dining theme’s popularity makes it difficult for anyone to grow. -6 -5 -4 -3 -2 -1 0 1 Olive Garden Carrabba's Italian Grill Maggiano's Little Italy Romano's Macaroni Grill -5.6 -1.8 0.2 -4.1 Calendar Year 2014 Q1 Comps (% Chg.)
  8. 8. Digital improvements are coming Darden promises additional enhancements will help brand renaissance, including a redesigned website: • National launch of “online To Go,” where orders are placed online for pickup at nearest restaurant • Can be prepaid online and discount coupons used • Favorite orders can be saved • Orders can be placed days in advance Will add tabletop tablets just like Chili’s and Applebee’s
  9. 9. The new logo
  10. 10. Updated interiors
  11. 11. Foolish takeaway • Investors have time to see if changes work. • Management is placing big bet on Olive Garden and track record isn’t the best. • Darden also faces shareholder revolt over Red Lobster sale. • Although stock trades at about 1x sales, it’s also nearly 33x earnings, a steep premium to rivals and better-run concepts. • Taking a wait-and-see approach to the fallout over Red Lobster’s sale is the prudent course of action.
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