Olive Garden showing signs of a turnaround

by Monica Watrous
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To improve lunch business, the Italian chain is looking to evolve its signature soup, salad and breadstick offering.

ORLANDO — Olive Garden is on the rebound. The Italian casual dining chain posted four consecutive months of positive same-restaurant sales growth.

“(This is) the first time this has happened since November of 2010,” said Gene Lee, interim chief executive officer of parent company Darden Restaurants, during a Dec. 16 conference call with financial analysts to discuss second-quarter performance. “We believe these results are early signs that our brand renaissance plan is beginning to take hold.”

Same-restaurant sales at Olive Garden rose 0.5% during the second quarter, benefiting from gains in the to-go business, which was up more than 15% over the year-ago quarter.

“This is due in large part to our on-line ordering platform which we launched in July,” Mr. Lee said. “We experienced an additional increase following the introduction of mobile ordering on Nov. 3, and we now have more than 30,000 on-line orders coming in every week.

“This growth is very important as a check averages 30% higher when guests order on-line. Takeout represents 8.6% of our total sales. Given the increasing trend for convenience, we believe we can drive takeout sales above 12% over time.”

The next step, he added, is catering and delivery.

Lunch represents another important opportunity for the chain, which has faced increased competition during the day part.

“We're feeling much more pressure with guest counts at lunch than we are at dinner,” Mr. Lee said. “Lunch is based around the convenience for a lot of people. The interesting thing about the Olive Garden lunch experience is that we have multiple constituents at lunch.

“We have guests who are looking for convenience that want to get in and out. We have guests that are looking for a business lunch that want to be in for an hour, hour and 15 minutes.

“We have a lot of guests that come to lunch, this is their big day out and they're looking for a two-hour experience. And so we're trying to satisfy different constituencies and have offerings for all of them.”

The key to reenergizing the lunch business, he said, is an evolution of Olive Garden’s soup, salad and breadstick promotion, what Mr. Lee called “the original fast casual offering.”

“Thirty per cent of our guests buy that,” he said. “But need to continue to innovate around that product. We've done some work with the salad toppers and some other menu items like the trios. And so we're making progress.”

For the second quarter ended Nov. 23, Darden sustained a loss of $32.8 million, which compared with net earnings of $19.8 million in the prior-year period. Earnings were adversely affected by restaurant-related asset impairments and lease buyouts, severance costs and expenses related to a strategic review of the business. On an adjusted basis, earnings per share increased 133% over the previous year.

Sales increased to $1,559 million, up 4.9% from $1,485.6 million in the second quarter of the year before.

Same-restaurant sales increased 2.6% for LongHorn Steakhouse and 3.2% for the Specialty Restaurant Group, which includes The Capital Grill, Eddie V’s, Yard House, Bahama Breeze and Seasons 52.

More changes afoot

In October, Darden announced its shareholders had elected to the board all 12 directors nominated by Starboard Value LP, the investor who the month before published an improvement plan that cited a number of problems with Olive Garden’s food and operations. With the new board in place, Darden is pursuing more cost-cutting initiatives, including staff reductions announced in November. And while 13 remodeled Olive Garden units have posted encouraging initial results, the company is putting additional remodels on hold for the rest of the fiscal year to reduce expenses.

Darden also is exploring options for its real estate portfolio, which includes more than 1,200 owned or ground-leased properties across the country.

“We want to be comprehensive and thoughtful in considering the options to ensure we're maximizing shareholder value while also maintaining the best structure for ongoing business,” Mr. Lee said.

Other strategies under consideration include franchising, as well as evaluating the composition of the brand portfolio.

“Of course, there are no assurances we will ultimately pursue any of these options,” Mr. Lee said. “While we do not have a set timeline or additional details to disclose now, we plan to provide updates if and when appropriate.”

Additionally, a search is under way for a new chief executive officer after Clarence Otis, former chairman and c.e.o. announced in July he would step down.

“Our board has been engaged in the business from day one, and the management team and the board are working well together in order to ensure we have the right strategy to drive long-term value creation for our shareholders,” Mr. Lee said.
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