Darden plans to revitalize Olive Garden

Darden Restaurants executives had a lot of explaining to do during their fourth quarter FY 2014 conference call with analysts last week. They had to describe exactly where the company stands after selling off longtime flagship brand Red Lobster for $2.1 billion and how they’re positioning for the future. Among new initiatives: embracing Millennials, taking on fast casual players at lunch and experimenting with tabletop tablets at Olive Garden.

Here are four key points from the Darden conference call, taken from a transcript posted on financial website Seeking Alpha:

1. Darden chairman/c.e.o. Clarence Otis began by giving a quick recap of the Red Lobster sale, which is set to close this summer. In a nutshell, he said Darden got top dollar for the aging seafood chain.

“The net sale was a result of a very robust process that maximized value and minimized risk. Total consideration was $2.1 billion in cash, that represents a purchase multiple of nine times trailing 12 months EBITDA as of April. The process involved 70 financial and strategic buyers and another 25 real estate buyers. 

“With the sale we expect our investment grade credit profile to remain intact, indeed to improve somewhat. We expect to maintain our $2.20 per share annual dividend. The sale will be accretive to Darden’s long term earnings growth rate, so we expect to have not only a higher earnings growth rate but higher sales growth rate and higher margins. With the sale we’ll have less volatility in our quarterly sales and earnings. The sale that was unanimously approved by our board and the $2.1 billion sale price is a premium multiple compared to comparable restaurant deals and we were able to secure that despite the fact that Red Lobster has some meaningfully declining operating trends.”

2. Next, Otis gave a big picture take on the current state of the restaurant industry. He noted that is it simultaneously becoming more mature and more dynamic.

“There are a number of things that are driving industry maturation. Certainly slower growth in the population aged 50 to 60, where dining out frequency is the highest and has always been the highest; slower growth in household income overall; increased competition, not only within full-service dining but also with the emergence of attractive new dining segments like fast casual; and elevated innovation within traditional quick service.

“As all that happens, some important demographic and economic dynamics define where the share growth opportunity is. That includes a significant increase in millennials, a significant increase in multicultural households across all age and household income spectrums, the increased spending power in generation X and—an overarching dynamic—the increased digital interconnectedness across all generations in all other demographics.”

Menu, service improvements under way

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3. Gene Lee, Darden president and c.o.o., then explained how Darden plans to reposition its 800-plus Olive Garden restaurants to mesh with current industry dynamics. For starters, new lunch and dinner menus designed to provide more choice and variety and, with a $9.99 price point at dinner for the Cucina Mia section of its menu, more value. Another solution? Tuscan Trio Combinations, nine new items at $2.99 that can be paired with soup, salad or breadsticks.

“We know this price point and the customization this offer enables is very compelling for our guests, especially millennial and value-conscious consumers. We also added a Tastes of Italy section which addresses the guest desire to sample different menu items served tapas-style. In addition, we have added seven new specialty items including four new lighter fare entrées, buttressing areas of the menu where our guests are looking for more choice,” Lee said.

Olive Garden has been testing online ordering to bolster its takeout trade, a small but growing portion of business. The test showed that check averages for online orders were significantly higher than for orders placed over the phone, and takeout sales for the restaurants with online ordering capability are growing at a faster than average rate.

4. Lee also told analysts that service improvement initiatives are under way, and that tabletop tablets may be in Olive Garden’s future.

“While there is opportunity to elevate the guest experience throughout the entire system, we have some restaurants that underperformed on many performance metrics and these restaurants are a significant drag on same-restaurant sales. Senior operational leaders have been assigned to these underperforming restaurants and will be accountable to improve their performance.

Olive Garden is also recertifying team members to reinforce training initiatives launched last year. And the company is partnering with Ziosk to introduce tabletop tablets, with a test planned to start in August.

A makeover is also likely for many older Olive Garden locations. “Same-store restaurant sales of 300-plus restaurants in need of a remodel lag the results of our other restaurants by more than two percentage points,” Lee said.