How Far Can Darden Go to Retain Its Customers?

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The sluggish and uneven recovery of the US economy is posing a big threat to the restaurant industry. Almost all restaurants are experiencing a tough time maintaining their top and bottom lines due to the decrease in the customer traffic.

It seems people now prefer to cook food at home as it is much cheaper than going out and dining in a restaurant. Thus to attract the budget-constrained customers, most of the restaurants are focusing on their value meals. One such company is Darden Restaurants(NYSE: DRI), one of the world's biggest full-service restaurant operators,which after facing the pinch of the decreasing consumer traffic has finally starter focusing on its value items.

What’s the fix?

Darden operates more than 2,100 restaurants in the U.S. and Canada under several brands, including Red Lobster, Olive Garden, Long Horn Steakhouse and Bahama Breeze. In order to attract customers, its flagship restaurants, Olive Garden and Red Lobster, have introduced new meal combos at cheaper costs, giving consumers more choices and greater variety.

Last year, the company also added some lighter dishes to the Olive Garden menu. As per the company, the introduction of those lighter dishes has helped it to capture about 10% more orders. The company plans to add more such options to its menu in order to attract customers. This will also help the company to boost sales further.

As I have already mentioned before, attracting budget-constrained customers with value meals is not a unique strategy for Darden. Many restaurants have applied the same strategy to increase the consumer traffic.

We have seen Burger King Worldwide (NYSE: BKW) make some aggressive adjustments in its menu over time. The burger chain has tempted customers with its 55th anniversary Whopper hamburger deal and limited-time deal offering Whopper Junior sandwiches for only $1.29, which really paid off well. The company reported 64% surge in its fourth-quarter earnings results backed by the 2.7% rise in comp sales and a 6.7% rise in its system-wide sales.

Another restaurant chain, Wendy’s (NASDAQ: WEN), has introduced menu offering options with price tiers from $0.99 cents to around $2. The company already performed decently in its last quarter as its North American company-operated restaurants generated a same-store sales increase of 2.7% and franchise same-store sales in North America increased 2.9%. The introduction of the company's “Right Price, Right Size” menu further attracted the budget-constrained customers with more options and thus boosted Wendy's customer traffic.

However, things are yet not so good for Darden Restaurants. The introduction of the value meals has no doubt increased consumer traffic, but it has also increased the company's cost of sales which has resulted in another not so good quarter for the company.

A quick look at the numbers

Throughout the quarter, the management focused on increasing consumer traffic in the restaurants by advertising the value meals to the budget-constrained consumers. And yes they were successful to some extent. Darden Restaurants reported an 11% surge in the top line to $2.3 billion in its fourth-quarter earnings for fiscal 2013, beating Street expectations. The rising numbers were backed by the increased consumer traffic in its Olive Garden, Red Lobster and LongHorn Steakhouse restaurants, which resulted in a 2.2% rise in comparable sales of these restaurants. Numbers were even decent in Darden’s specialty restaurant group, which includes The Capital Grille, Eddie V's and Seasons 52.

Despite the top-line growth, Darden's fourth-quarter earnings were not up to the mark. The rising costs and expenses have taken away all the shine from the rising top line and have resulted in a 12% drop in the company’s bottom line. Eliminating costs and purchase-accounting adjustments tied to its acquisition of Yard House USA, the earnings were $1.02 per share, which is $0.02 cents less than Street estimates. For the entire year, Darden earned $411.9 million, or $3.13 per share, and its annual revenue increased by 7% to $8.5 billion.

Foolish takeaway

For any company in the restaurant industry, an increase in consumer traffic should no doubts be the priority, and Darden is more or less on the right track. Its management is paying huge attention to increasing consumer traffic at its restaurants. For the short term, it might be a bit tough for the company to increase its profit margin. It will continue to focus on its value meals in order to attract more customers, resulting in the increase in cost of sales.

However, with time, as the US economy stabilizes and customers start spending more money, there can be a huge turnaround in the fortune of this company. Also, its new effort to revamp its menu with preferred food choices of its customers might also be fruitful for the casual-dining chain. So in the long run, this stock is worth keeping an eye on.

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Satarupa Bose has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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