Olive Garden Sales Improving, Darden Shows Modest Growth (NYSE: DRI)

olive-gardenIt has only been two years since the hedge fund Starboard Value took over control of the governing board of Darden Restaurants (NYSE: DRI). Since that time, though, 7 of the board’s 12 directors have stepped down, and that includes former chairman and activist investor Jeff Smith.

Darden, of course, is the parent company of the Olive Garden. And the takeover was an attempt to help save the Italian casual-dining restaurant chain wade through this particularly difficult time in the industry. Indeed, Darden Restaurants CEO Gene Lee comments that even after two years of cutting costs and getting things “back to basics”—improving the company’s financial outlook—the industry continues to weaken.

Lee says, “I would say that as we think about the industry, we prepare our plans and we assume the industry is going to stay where the industry is going to stay,” adding, “we’re not assuming the industry is going to get a whole lot better.”

And Lee also makes sure to note that consumer uncertainty may be largely at fault for driving down sales. He goes on to say, “I think there is some real uncertainty in the near-term here, but that’s going to pass, and from a consumer standpoint. I think we’re focused on the long-term.”

Even though Lee cites consumer confidence measures from both the Conference Board and the University of Michigan either at or nearing post-recession highs, the restaurants continue to struggle. He notes that Darden (NYSE: DRI) has even posted higher sales for its whole chain as well as the Olive Garden brand, and is posting higher earnings per share than expected.

Indeed, Darden’s 2016 financial year sales are up 4.7 percent (ending in June). That may appear to be somewhat minimal growth, but keep in mind that last year—Darden’s first year taking over the Olive Garden board—revenue was up 14 percent.
So what else could they do to continue moving forward?

Lee says that closing some restaurants could help to improve overall outlook. He adds, “I’m hoping that more inventory will come out of the system. We’ve seen some big announcements of closures lately and I also think that if you drive down the road you’re starting to see more restaurants closed. You also see more restaurants opened, but we could use some inventory to come out. That would be helpful.”

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