Olive Garden Comeback Helps Fuel Rally at Darden Restaurants

  • Italian eatery was Darden’s fastest-growing brand last quarter
  • Once-struggling business has rebounded since shake-up in 2014

A comeback at the once-struggling Olive Garden chain is helping Darden Restaurants Inc. outperform its casual-dining peers.

Same-store sales grew 4.4 percent at the Italian eatery last quarter, handily beating the average analyst estimate. That marked the fourth straight quarter of better-than-projected gains at Olive Garden and helped send Darden on its biggest rally in three months.

Olive Garden, Darden’s largest chain, has recaptured its allure in the years since a power struggle at the company led to the entire board being replaced. Activist investor Starboard Value led a proxy battle against Darden in 2014 and unseated every director at the Orlando, Florida-based company. Since then, Olive Garden has debuted a back-to-basics menu and overhauled kitchen operations.

“Olive Garden’s emphasis on to-go orders, entry-level price points, and fully customizable offerings once again proved successful,” David Palmer, RBC Capital Markets analyst, said in a note. “Customers are demanding value.”

The chain has also rolled out healthier options, such as 500-calorie shrimp scampi.

The company’s performance brings broader optimism that the U.S. dining sector can turn things around after a slump this year. Industry same-store sales rose 0.6 percent in May, according to data from MillerPulse.

Millennial Appeal

About 30 percent of Darden’s customers are from the millennial generation, Chief Executive Officer Gene Lee said on a conference call Tuesday.

“Believe it or not, millennials still want to come to restaurants,” he said. Still, like its peers, Olive Garden has been advertising its to-go business and is experimenting with delivery too.

Shares of Darden rose as much as 4.8 percent to $94.38 in New York, the biggest intraday gain since March 28. They had already climbed 24 percent to $90.08 this year through Monday’s close.

Olive Garden’s same-store sales -- a closely watched measure -- beat the 2.8 percent growth predicted by analysts, according to Consensus Metrix. LongHorn Steakhouse, another one of Darden’s major chains, gained 3.5 percent on that basis. Analysts had projected 1.8 percent. The company’s other brands, including the Capital Grille and Yard House, didn’t grow as fast.

Darden expects earnings of $4.38 to $4.50 a share this year, excluding some items. The midpoint of that range would top the $4.42 predicted by analysts. It also boosted its quarterly dividend to 63 cents from 56 cents.

Still, the company is seeing pressure from wages, with labor costs up about 3 percent to 4 percent compared to last year.

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