Editor's Note -- This story was updated on Thursday, Sept. 15, 2016 at 4:00 p.m. ET to reflect results of the company's Never Ending Pasta promotion.
Operating a traditional restaurant was tough in the second quarter.
That much has been reinforced during my chats with execs at restaurant companies in recent weeks. The cautious U.S. consumer has sent teams scurrying back to figure out what "value" truly means. Does it pay to offer 50% off for a dinner meal, or is it better to unleash bigger portion sizes amid input cost deflation. Struggling Buffalo Wild Wings (BWLD) , for example, slashed wing prices by 50% on Tuesday to drum up business and appease its new activist investor. DineEquity (DIN) , on the other hand, has debuted giant croissants at its IHOP restaurants, packed with various breakfast ingredients. It has also taken the croissant and used it for a new kids pizza. Again, different approaches all targeted to trying to show the nervous consumer some added value.
But amid the various negative headlines on restaurants, and pressured stock prices, one company has managed to stand out in a positive way. That name is Darden Restaurants (DRI) , which notched a solid same-store sales gain at its largest chain, Olive Garden, during the second quarter. Traffic was also up, always a good sign in the competitive restaurant business.
Here is the lowdown on why the company is doing well, and likely will continue to do so.
It all starts from the top, as far as I am concerned. CEO Gene Lee is not the typical spotlight-seeking restaurant executive. He is very content to focus solely on execution across marketing and product. Winning is the only thing this long-time restaurant industry veteran wants to do, and it is OK with him if he never does a TV interview to hype up the company. Lee gets a thumbs up from this writer with that approach.
Lee's attention to detail can be seen across the Olive Garden menu and marketing messages over the past year. Olive Garden's creative spaghetti pies and breadstick sandwiches -- launched for a limited time a few months back -- explain a great deal about why Darden's Olive Garden chain has been on the comeback trail. In short, both menu items highlight a brand that is being more innovative and offering more value -- just a few years after an ugly battle with an activist investor that led to the removal of the entire board. Meanwhile, Olive Garden has extended its popular breadstick sandwich platform -- introducing spicy chicken and eggplant parmigiana variants.
And here is a good example of how much Darden is on a roll right now. The company's Never Ending Pasta passes, which went on sale at 2 p.m. ET Thursday, sold out in less than a second, Darden said. The company is now auctioning off 21 additional passes on eBay. Proceeds from the auction will be donated to Feeding America. Last year, the company quickly (in one second, to be exact) sold out of the 2,000 passes it released at $100 apiece, which allows a person to plop their rear-end in an Olive Garden and gorge on all the pasta they can eat. The money it will raise from the cards, about $2 million, isn't going to move the needle on Olive Garden's quarter, but could easily be something that goes viral and drives interest in the brand. At the very least, it will get people through the door, trying the new menu -- and also enhance the company's "value" messaging.
Consumers and investors have responded to the revamped Olive Garden. The chain has cooked up over seven straight quarters of same-store sales growth, no mean feat in the sluggish casual-dining sector. The comeback of Olive Garden over the past year and a half has helped fuel Darden's stock. Shares of the restaurant operator have gained about 25% during the last two years, outperforming the S&P 500's 7.2% gain. During the recent selloff in traditional restaurants, the stock has held up better than most.
Trading at about 14x forward earnings, with a dividend yielding more than 3.5%, Darden is worth a nibble -- based on the continued turnaround of Olive Garden and visible struggles at several competitors, such as Brinker International (EAT) and Buffalo Wild Wings. Food deflation helps, too. Look for the company to reiterate its fiscal-year 2017 earnings guidance of $3.80 to $3.90 a share when it reports results on Oct. 4, which the market is likely to view favorably, given the external backdrop.