Much to cheer at Darden, but Olive Garden traffic still declining

For Darden Restaurants (DRI), its latest earnings report had a good deal of good news -- enough to take the stock to another all-time high.

What it also had was an area that still needs work, an area that will be important to how the company and its shares fare in the months and years ahead: The continuing weakness in customer traffic at established Olive Garden restaurants, Darden's largest brand.

In the last 40 months back to November 2011, year-over-year monthly customer traffic has been positive only nine times. It's been so once in the past year. Pricing, meanwhile, has been up every month year over year, at an average pace of 1.8%. "Menu mix," which along with price changes and guest counts combine to create total same-store sales, has been inconsistent, though the trend there is going in the right direction. Five of the last seven months are up, including the last three. What that indicates is that the diners who do visit Olive Garden aren't only paying up because the restaurant has raised prices, but that they are choosing items that cost more.

However, the traffic issue does need to be reversed eventually. Those price increases and higher spending amounts can sustain same-store sales for a time, but at some point, the concern would be that ever-greater pricing is being needed to maintain all the sales increases. How long will Olive Garden patrons not mind? Until they stop perceiving it as a "value," that is, worth the price they pay.

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That varies from restaurant to restaurant. Chipotle (CMG), the fast-casual burrito seller, is mid-priced, and prices have gone up, but traffic is growing. McDonald's (MCD) is (or at least has been) low-priced, but prices also are going up, and traffic is falling. McDonald's various issues are a separate story entirely -- the point is that, as it has lifted prices, it's likely caused some of its core customers to seek cheaper alternatives.

For now, the customer traffic matter isn't causing too much worry at Orlando, Fla.-based Darden or among investors because all the other developments are winning out. In the last year or so, Darden has seen activists replace the board, it has named a new CEO, it's updated aspects of the menu, it's started remodeling certain locations and it sold Red Lobster.

And the stock has repeatedly set record highs. That was true again Friday, with the shares climbing as high as $67.74. Recently, the stock was adding 3.3% to $67. The gain followed Darden's announcement that third-quarter sales were $1.73 billion, with same-store sales up 3.6%. Earnings were 99 cents a share. All of those numbers were better than Wall Street had estimated. At Olive Garden, which contributes more than half of Darden's total revenue, same-store sales rose 2.2%. Meanwhile, for the fourth quarter, Darden offered an earnings outlook that would surpass the consensus view.

It was a solid report. Still, the Darden story does include that traffic problem at Olive Garden. If it doesn't resolve this, pricing can't cover the customer decline forever. But if it can, and the other business metrics keep ascending, even greater new highs for the stock may be the new normal.