Darden Restaurants Cultivates Its Olive Garden

By Gregory S. Davis | January 29, 2009 AAA

Flavorful meals derived from Olive Garden's Culinary Institute of Tuscany in Italy combined with reasonable menu pricing in the U.S. has helped Darden's (NYSE:DRI) Italian-themed restaurant chain become its most successful brand. Instead of job cuts or reports concerning huge losses and write-downs, Darden's analyst conference last week revealed the appeal Olive Garden still has for value-seeking customers. Let's take a look at what Darden's serving up for the future, and how it plans to continue to satisfy despite the tough economic climate.

Growth
Darden Restaurants is the home of Olive Garden, Red Lobster, Season 52 and Bahama Breeze, LongHorn Steakhouse and the Capital. During its analyst conference, Darden announced that a slowdown in customer traffic is expected to lower same store sales anywhere between 1.25% and 2.25% for the end of its 2009 fiscal year in May. The expected slowdown caused Darden to reduce the total number of new restaurant openings originally planned for fiscal 2009, but it's still focusing on building 36-38 new Olive Garden restaurants - and with good reason.

Value
Darden added 39 new Olive Gardens to its portfolio during the 2008 fiscal year. Same store sales growth increased 4.9%, driven by a 3% increase in guest checks and a 1.9% increase in the number of guests dining at Olive Garden. The increases helped Olive Garden generate a record $3.07 billion in revenue, with the average restaurant generating $4.9 million.

Competitors
"We recognize that consumers are under incredible pressure and are more discerning about how and where they spend their discretionary income," Darden's CEO Clarence Otis said at the end of the company's second quarter, ending November 2008. Consumers are having to make tough choices about whether they can afford to go out to eat at all, and Darden brands also compete with fast food giants like McDonalds (NYSE:MCD) and Yum Brands' (NYSE:YUM) Pizza Hut and Kentucky Fried Chicken chains.

In the sit-down dining space, Darden competes with Brinker International Inc. (NYSE:EAT), which owns the Chili's, Maggianos and Macaroni Grill brands, and DineEquity (NYSE:DIN) which operates Applebee's and the International House of Pancakes. Brinker reported a loss for the second quarter of its fiscal 2009 period due to a 5.4% drop in same store sales from the same period a year ago. The closure of 189 Macaroni Grills was cited as one cause. DineEquity completed the acquisition of the Applebee's restaurant chain at the end of 2007. Although Applebee's added $298 million to the consolidated company's revenues for the third quarter ending September 30, Q3 still reported a $14.8 million loss from continuing operations from interest expense on $2.3 billion of funded debt, impairment charges and a loss on a financial derivative in 2007.

Final Thoughts
Darden is supported by the strength of its Olive Garden brand and customers' desire to get the most value for their dining experience. These are good signs for Darden's revised menu for future growth and its appetite for profits.

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