The former interim and now permanent CEO of Darden Restaurants, Inc. (NYSE: DRI) Gene Lee has a lot to be excited about.
All of Darden’s restaurant brands — which include the Yard House, Capital Grille and the LongHorn Steakhouse — have recently reported growth in same store sales. Collectively, all of Darden’s restaurants were up 3.6% for the latest quarter. DRI’s total sales came to $1.73 billion for the quarter, up 6.9% from the same period last year.
Lee also used the latest DRI stock holders’ earnings call to highlight major improvements in Darden’s Olive Garden restaurants.
Given both the numbers for Darden’s ubiquitous Italian restaurant brand as well as the strength in its other chains — as well as the momentum built up in DRI stock — it’s hard not to be excited about this once-struggling dining stock.
Squeezing the Good Stuff out of Olive Garden
As noted, Lee took the opportunity to single out impressive results across the Olive Garden brand.
The Italian restaurant brand enjoyed 2.2% same-store growth — the first time since 2010 that the Olive Garden boasted two consecutive quarters of expanding comps. Olive Garden also posted its best labor efficiency in more than a decade.
DRI turned fewer weeks of price promotions for the Olive Garden into higher profitability over the last quarter. Even more impressive is that the restaurant had less foot traffic in December and January, but still was able to bring in the profits due to the growth in beverage, add-on items and desert orders.
And while the cost of sales was higher, Olive Garden’s simplified operations with a focus on cost management and higher profitability was able to improve the restaurant’s margins.
Darden has been able identify additional cost efficiencies. CFO C. Bradford Richmond expects that DRI can achieve $30 million in savings for the remainder of the year, with an additional $40 to $50 million in savings in fiscal 2016. By the time all the cost efficiencies are implemented by fiscal year 2017, Darden Restuarants should have cumulatively saved $90 to $100 million. This should add to the improvement of its margins and benefit those who hold DRI stock.
On a different note, Lee noted that Darden Restaurants was looking to minimize its real estate holdings by listing 16 properties for as triple-net sale-leaseback opportunities, which include Olive Garden and LongHorn restaurant locations. The demand for the first 16 properties was so great that DRI listed another 15 properties under the same arrangement. The triple-net sale-leaseback properties allowed Darden Restaurants to divest the ownership of real estate and add to its $436 million in cash, while being able to secure appropriate rent and lease terms.
What’s Next for Olive Garden?
While Olive Garden does seem to be pulling off a comeback, Darden Restaurants does face some upcoming challenges in the near future.
As mentioned before, Olive Garden foot traffic did decline slightly in the past quarter. Some of the loss in foot traffic was due to poor weather in December and February, however. If DRI can find a way to continue the operational and sales profitability in the Olive Garden while increasing foot traffic to its restaurants — which, in fairness, not the easiest of tasks — Darden will be in a much better place.
Also, Darden is holding onto over $436 million in cash, which is still growing as it continues its triple-net sale-leaseback push. The company doesn’t have any plans for the cash at the moment, other than announcing that the company will distribute a dividend of 55 cents per share of DRI stock — the same amount it has paid out quarterly since mid-2013. While dividends are certainly welcome — Darden’s 3.2% yield is hardly anything to scoff at — it’d be nice to see more of Darden’s cash be put to use generating value for DRI shareholders.
Bottom Line
The key to continued growth in profits is just bolstering that foot traffic while keeping its current operational advances in line. Furthermore, it’d be nice to see Darden explore more ways to put its cash reserves to good use.
While we’re in “wait and see” mode on both those fronts, I’m still optimistic with what Darden has done with the Olive Garden in the past couple quarters, and am bullish on DRI stock.
As of this writing, Johnny Chen did not hold a position in any of the aforementioned securities.
