EAT Brinker International Inc

Olive Garden, which is operated by Darden Restaurants Inc. (DRI), is planning extensive remodeling by June 2013.

The food chain recently announced that the interior or exterior of more than half of its 700 plus restaurants across the United States will get the look of farmhouses in Tuscany, Italy.

Olive Garden bounced back to growth in the first half of 2011 after a lackluster year. The company’s third quarter U.S. same restaurant sales were flat, 1.5 percentage points below its own estimate. In a value-sensitive environment, management’s effort to drive promotional offers did not fully pay off for Olive Garden.

Darden management still believes that Olive Garden has a strong business model. Hence, in order to enhance its breadth of appeal and value emphasis required in the current environment, management decided to remodel its restaurants. The Italian concept will also build the culinary distinctiveness of the brand.

Earlier, remodeling initiatives had benefited Darden’s other brands, including Red Lobster and LongHorn Steakhouse. LongHorn Steakhouse’s third quarter U.S. same restaurant sales increased 6.1%, which is 1.5 percentage points better than Darden’s estimate. The brand remodeled 75 existing restaurants during the first nine months of fiscal 2011 and will work on 37 more during the fourth quarter. The remaining 27 restaurants will be remodeled in the first half of fiscal 2012.

Red Lobster, which has been struggling to post same restaurant sales growth in the last few quarters, reported third quarter U.S. same-restaurant sales growth of 0.1%. This was 1 percentage point better than the company’s estimate, driven by its new approach. Red Lobster continues to remodel restaurants and is on track to have nearly one-third of its system completed by the end of the fiscal year. Remodeled restaurants maintained a sales growth of 4% to 5%, which exceeded the requirement to cross the return on investment hurdle.

Going forward, management remains committed to Olive Garden taking all the necessary actions to sustain same restaurant sales growth. Management expects blended U.S. same restaurant sales for fiscal 2011 for Red Lobster, Olive Garden and LongHorn Steakhouse to remain between1.5% to 2%.

Darden which competes with Brinker International Inc. (EAT) currently retains Zacks #3 Rank, which translates into a short-term Hold rating. We also reiterate our long-term Neutral rating on the shares.

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