Darden Restaurants, Inc. (DRI): Value-Driven Menu Changes and Promotion Will Drive Sales Growth at This Company

Darden Restaurants, Inc. (NYSE:DRI) has gone through a tough phase over the last few years, but it is looking forward to driving sales through menu changes at its top two brands, Olive Garden and Red Lobster. It is focused on increased value offerings at both brands and also promotion of these offerings through digital media. In unit expansion plans, it is planning to reduce capital expenditure this year across major brands. Darden is one of the highest yielding companies in the industry with a 4% dividend and will be returning more cash to its shareholders with the reduced capital expenditure this year. Let’s discuss these points in detail.

Menu changes will drive sales growth at Olive Garden and Red Lobster

Olive Garden and Red Lobster are two major Darden Restaurants, Inc. (NYSE:DRI) brands which contribute more than two thirds of its revenue. It is looking forward to attracting more customers with menu changes and promotions. Olive Garden will also try to gain higher customer footfall with healthier, protein-forward core menu additions. It has expanded its two for $25 “Italian Dinner” platform. Red Lobster has recently introduced “Seaside Express” at select restaurants with facilities similar to fast casual restaurants. These outlets will offer fast counter service and quick delivery to customers. Its new Lobster menu will attract more traffic with its focus on value and more non-sea food offerings. In this menu, 60% of dishes will be priced under $15 and 25% of dishes will be non-seafood.

Promotional offers with use of digital media are expected to attract customers

The company will promote its value offerings with value focused promotion across the brands. Olive Garden will be benefited by the re-introduced promotional offer “Dinner Today, Dinner Tonight,” which is a re-imaged “Buy One, Get One.” This new tagline reflects its value message effectively. At Red Lobsters, the “2 for $25 Seafood Feast” promotion will attract value-conscious customers. It has also enhanced the reach of its promotional offers with increased use of digital media. It provides free digital coupons and apps in the latter part of the promotional offers.

Reduced capital expenditure at Olive Garden and unit growth potential of Specialty Restaurant Group will drive growth

The management has reduced the capital expenditure for FY 2014 by 10% to $675 million. They will also reduce the pace of unit expansion and remodeling under the Olive Garden brand in this fiscal year. Store expansion will remain around 15 units, as compared to the estimated 30 units for the year. The company has huge cash flow potential with the self-funded Specialty Restaurant Group, including the Yard House brand, which is expected to take the group sales to the $1 billion mark. It has plans to add 150-170 restaurants over the next 4-5 years and drive growth in the long-term.

Peer Analysis

In casual dining restaurants, the other two major players that compete with Darden Restaurants, Inc. (NYSE:DRI) are Texas Roadhouse Inc (NASDAQ:TXRH) and Brinker International, Inc. (NYSE:EAT). Texas Roadhouse is a full service restaurant with 400 locations and plans to make that number 700-800 in the long term. It will increase its presence in two more states this year, representing 49 out of the 50 states. Overall, it will open 28 stores in this fiscal year, and 65% of the new stores will open in the second half of fiscal year 2013. Food inflation will continue to increase the cost of goods sold, especially beef; but it will try to offset this with 2%-3% menu price increases. It has reported same stores sales growth of 3.5% for the first quarter 2013, above the consensus estimate of 2.2%. It is expected to continue this sales growth with increased traffic and store growth this year.