How Far Can Darden Restaurants, Inc. (DRI) Go to Retain Its Customers?

Darden Restaurants, Inc. (NYSE:DRI)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, Inc. (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 Restaurants, Inc. (NYSE:DRI) 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 Restaurants, Inc. (NYSE:DRI). Many restaurants have applied the same strategy to increase the consumer traffic.

We have seen Burger King Worldwide Inc (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, The Wendy’s Co (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 The Wendy’s Co (NASDAQ:WEN) customer traffic.

However, things are yet not so good for Darden Restaurants, Inc. (NYSE:DRI). 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, Inc. (NYSE:DRI) 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 Restaurants, Inc. (NYSE:DRI)’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 Restaurants, Inc. (NYSE:DRI) 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.

The article How Far Can Darden Go to Retain Its Customers? originally appeared on Fool.com and is written by Satarupa Bose.

Satarupa Bose has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. The Motley Fool owns shares of Darden Restaurants. Satarupa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!