Lasagna is usually a crowd favorite, but Olive Garden’s fiscal second-quarter results disappointed after a failed “Lasagna Mia” promotion drove down same-restaurant sales.
Olive Garden, which is the star of the Darden Restaurants Inc. DRI, +2.40% portfolio of restaurant brands, reported 1.5% same-restaurant sales growth, down from 2.2% in the first quarter. For fiscal 2019, Olive Garden’s same-restaurant sales growth was 3.9%.
Other Darden brands include Longhorn Steakhouse, which reported 6.7% same-restaurant sales growth, and The Capital Grille, which was up 1.8%.
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“Olive Garden had a difficult promotional ramp to start the quarter with ‘Lasagna Mia’ comping over ‘Buy One, Take One’ for the first four weeks,” said Darden Chief Executive Eugene Lee on the earnings call, according to a FactSet transcript.
“Additionally, we made some changes to our promotional messaging and we reduced marketing spending. As a result, we had to make up some ground from negative same-restaurant sales at the beginning of the quarter.”
Lee said the popular Never Ending Pasta Bowl promotion drove improvement.
JPMorgan analysts note that the “Lasagna Mia” promotion was pulled after three weeks, and Olive Garden added a lunch menu of 21 items under $10 during the final four weeks of the quarter.
“Breaking through presidential election media clutter is going to be a broad challenge to industry messaging effectiveness in calendar 2020,” analysts warn.
JPMorgan rates Darden shares neutral with a $120 price target.
“We expect Darden to remain measured in its value approach, but believe there is the potential to step up its promotional and incentive-laden offers as needed to protect traffic within the segments of its consumer base that are value-focused,” said MKM Partners.
MKM rates Darden stock neutral with a $120 fair value estimate.
Despite the weakness at Olive Garden in the most recent quarter, SunTrust Robinson Humphrey analysts are still bullish.
“The full-service promotional environment appears to be heating up, but we view Olive Garden as well positioned, given its everyday value and ability to target incentives,” analysts said.
SunTrust notes that Dine Brands Global Inc.’s DIN, -0.42% Applebee’s chain will focus on maximizing value going forward.
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“While we do not expect a ‘value war’ due to a relatively strong consumer and operating cost inflation, we do expect larger chains with scale to gain share with an increased value focus,” SunTrust said.
Darden stock has gained 11.3% over the past year while the S&P 500 index SPX, +0.45% is up 30% for the period.
