Olive Garden sales rise on new menu items

by Monica Watrous
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Customization platforms like the create-your-own lunch combination helped boost Olive Garden's sales.

ORLANDO — New customized offers at Olive Garden helped boost sales this summer for parent company Darden Restaurants. For the first quarter ended Aug. 30, Darden had net earnings of $86.4 million, equal to 67c per share on the common stock, down from $503.2 million, or $3.81 per share, for the prior-year period. The comparable quarter included the gain on the sale of discontinued operations. Adjusted earnings per share increased approximately 113%, according to the company.

Sales for the quarter increased 5.7% to $1,687 million over year-ago sales of $1,595.8 million, driven by a 3.4% increase in same-restaurant sales and the addition of 30 net new restaurants.

Gene Lee, c.e.o. of Darden

“Olive Garden continues to build on the positive business momentum generated in F.Y.15 with its fourth consecutive quarter of same-restaurant sales growth,” said Gene Lee, chief executive officer, during a Sept. 21 earnings call with financial analysts. “During the quarter, guest counts turned positive and outperformed the industry by more than 200 basis points. As we’ve discussed previously, a key element of Olive Garden’s culinary strategy is to create menu items that leverage core brand equities.”

During the quarter, Olive Garden introduced a create-your-own entree promotion and a create-your-own lunch combination, the latter of which featured a choice of unlimited soup or salad and a mini pasta bowl, a flatbread or a breadstick sandwich.

“This platform strengthened Olive Garden’s competitive advantage by adding more variety and giving guests the ability to customize their order for a great value,” Mr. Lee said.

Other initiatives under way at the Italian chain include the roll-out of tabletop tablets, restaurant reimages, and testing of home delivery.

Darden’s other brands, which include LongHorn Steakhouse, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s, also posted positive same-store sales during the quarter.

“Each brand is well-positioned in its competitive set and has the opportunity to increase their market share through same-restaurant sales growth and the addition of new restaurants,” Mr. Lee said.

Regarding a comprehensive real estate plan announced in June, Darden executives provided an update on refinements made to the plan. The company now intends to separate 488 restaurant real estate properties through the sale leaseback of 64 restaurant properties and a real estate investment trust (REIT) spin-off that will include 424 restaurant properties to create an independent company called Four Corners Property Trust. Using proceeds from the sale leasebacks, debt financing from Four Corners and Darden’s balance sheet cash, the company expects to retire approximately $1 billion of debt and pay approximately $100 million of debt repayment cost, representing the acceleration of interest payable through 2017.

“The approximate annualized financial impact of these restaurant real estate transactions to Darden will include incremental cash rent of $108 million and GAAP rent expense of $116 million, a reduction in depreciation of $51 million, and a reduction in interest expense of $45 million, resulting in a run-rate reduction to pretax earnings of $20 million,” Mr. Lee said. “Of course in the spin-off, Darden’s shareholders will receive equity in Four Corners, the new owner of the real estate.”

For fiscal 2016, Darden expects combined U.S. same-restaurant sales growth of 2% to 2.5%.
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