Darden's eateries need a new recipe

The company's Olive Garden, Red Lobster and LongHorn fast-casual chains are clearly struggling. At least a juicy dividend gives the stock some appeal.

By Jonathan Berr Mar 25, 2013 9:23AM
Darden Restaurants (DRI) has left a bad taste in the mouths of investors for a while. Consumers fled the company's Olive Garden, Red Lobster and LongHorn Steakhouse chains when the economy soured, and they haven't come back. That trend was evident in the Orlando, Fla., company's latest earnings report.

Net income in the last quarter fell to $134.4 million, or $1.02 per share, down 18% from $164.1 million, or $1.28, a year earlier. Excluding one-time items, profit was 26 cents a share, matching expectations. Revenue rose 7% to $1.96 billion, slightly better than the $1.95 billion consensus forecast.

Exceeding analysts' expectations, however, is less impressive when not much is expected to start.

All of the company's chains continued to struggle even though Darden has spent big bucks on promotions. Same-store sales, a key metric for the performance of locations open at least a year, plunged 6% at Red Lobster, 4.1% at Olive Garden and 1.6% at LongHorn Steakhouse.

Darden is trying hard to bring customers back. It's testing no-tip counter service at Red Lobster, a strategy that has worked for some rivals. But critics have argued that Darden's efforts may turn off customers looking for good but not necessarily the cheapest food. And last year, Darden angered customers when it threatened to move full-time workers to part-time status to avoid costs associated with Obamacare.

Darden clearly has some serious problems. The company's marketing has emphasized price over quality, and now it plans to offer more lower-price menu options to attract more diners. Unfortunately, that puts Darden's brands in a head-to-head competition with fast-food chains that they can't win. 

As a stock, though, Darden may still be the best option for investors in the troubled fast-casual dining sector. Indeed, Mark Kalinowski, a restaurant industry analyst at Janney Capital Markets, is quoted in the Orlando Sentinel as saying the sales declines have "bottomed out" in the most recent quarter.

The stock is certainly attractively priced. With a price-to-earnings multiple of 13.95, Darden is trading near a five-year low and at a discount to its peers. The 52-week price target on the shares is $49.49, near where it trades now. But Darden also features a dividend with a tasty yield of 4%, far better than its rivals such as Brinker International (EAT) and Cheesecake Factory (CAKE).

Steady returns like that can be worth biting into in today’s uncertain markets, but keep an eye on what Darden is cooking up in its kitchen.

Jonathan Berr does not own shares of the listed stock. Follow him on Twitter @jdberr.

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157Comments
Mar 25, 2013 9:59AM
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The issue with Darden has been discussed many times. They still won't acknowledge that their problem is simple: need higher quality food at lower prices.
Mar 25, 2013 10:15AM
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Darden has been in decline for years, not because of lack of promotion, or even the price point of the menu items. IT'S THE MENU ITSELF !!  It stinks, the items offered are not worth it nor do they make for a good dinning experience. The money you might save by going 'cheep' will only be spent in other ways like a 12 pack of imodium ! People will gladly pay a little more for quality food that is actually prepared rather than 'assembled' in the kitchen. And having quality employees?

Forget about it ! You WILL NOT HAVE QUALITY  with cutting their hours; While servers might be 'a dime a dozen'- SO ARE RESTAURANTS !

 

This little phase is what 'Olive Pit' servers sing: (to be sung to the tune of the Hospitalliano song)

 

"FROM THE PASTA WE BURN, TO THE TIPS WE DON'T EARN-OH WE WISH WE NEVER WORKED HERE !

Mar 25, 2013 12:59PM
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Paying $14 for PASTA is ridiculous, it cost them a penny to make. 
Mar 25, 2013 12:14PM
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Who wants to go out to eat anymore.....Marginal service, surly waitstaff, sub-par quality food (never served hot), sticker-shock bill, and then have to leave a tip or get worse service next time? I think NOT. And it's not just Darden.....it's ALL of them.....
Mar 25, 2013 11:01AM
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Higher prices, shrinking portions and poorer quality.  That is what is the problem with most chain restaurant.  Embarrassingly, I used to eat out almost every night. About three or four years ago it seemed like the food was getting poorer, and I know the portion size went down and prices went up.  What consumer is going to stick around or that.  If the food got better the other two would be fine, but it got worse, much worse.  They just kept on trying to squeeze out bigger profits, which effected quality, which has all but ruined the once powerful Olive Garden and red lobster brands.  I guess I should thank all of the big chains in a way because I save money eating at home and am a million times healthier.
Mar 25, 2013 11:03AM
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Their hokey theme and overpriced food used to be what people thought of as a nice night out, however most of the people I know now consider their restaurants to be the trashy version of a night out.  I have not been to a Red Lobster in 5 - 6 years, and it is not because of the economy.  The last time I went was for a business lunch, and the bill for 3 people with no alcoholic drinks was nearly $70.  Give me a break!  For that kind of money you can have a very nice meal at a much nicer restaurant, and you won't leave feeling sick.  The last time that I was at an Olive Garden was probably 3 - 4 years ago, and I opted for the unlimited soup, salad, and breadsticks, which I am sure has continued to go up in price but not quality (if it is even still offered).  Everything was fine, but as always with this place, you can not escape without being hounded over and over to purchase a dessert that you don't want.  I have had waitstaff go as far as asking if they could just package a dessert up and send it home with me.  I highly doubt that I will ever return to either of these restaurants.  Along the same lines as Sick of it in NH, if I want to go out and spend the kind of money that these chains are asking, I am going to go to a much classier restaurant that serves a far better quality of food.

Mar 25, 2013 12:24PM
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So they take money away from their workers by removing tipping, but don't lower their prices. Again a major corporation trying to make bigger profits by hurting the employees. I will not go to any of their restaurants.
Mar 25, 2013 11:10AM
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Also, almost all chain restaurants need to figure out that adding sodium is not a substitute for flavorful food.  I like salty food, and there is a lot of food at these chain restaurants that is so salty I can't even eat it.  Not to mention, the use poorer quality food and just add sodium formula is wrecking people's health.
Mar 25, 2013 1:19PM
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My wife and I enjoyed Red Lobster for years. Then we noticed the food quality slowly deteriorating until it just became inedible.
Mar 25, 2013 12:56PM
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People are returning to locally owned establishments, leaving the highly processed, microwave thawed chains.  I ate at a Red Lobster several months ago and it was awful. 
Mar 25, 2013 12:40PM
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Poorly prepared food higher than average cost per person but hey free bread! That's the business model for Darden.
 I have been to 2 Darden restaurants in the last 11 years (because of 2 separate gift cards). Olive garden was so bad I sent the food back and didn't order anything else, and the server was not surprised. Red Lobster was ok, but it was buffet quality food for Prime steakhouse prices. $80.00 for a family of 4?(2 adults and 2 children).
 You get a better meal and better value at the local mom and pop place in any town than in these glorified fast food places.
  Then they scoff at having to cover medical care for their employees? Forget about paying the staff  a livable wage, forcing them to live for tips. Raising the cost of the meal (15-30%)because WE have to supplement Darden's poor employment  practices. Thats reason enough to boycott them.
 And even as he was threatening to knock everyone down to part-time Clarence Otis (CEO of Darden) got a 15 percent bump in total compensation last year, with an earnings package worth $7.7 million. Thats a lot of cash for running a company into the ground.
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Look, I am a disable vet living on a fixed income.  I drool when I see your commercials on tv about succulent this and that.  At the prices you offer that is all I can do.  Drool.  So I go and get a lobster tail and bake it myself.  A little olive oil & squeezed lemon over an avocado/tomato/blanched asparagus salad with a dash of fresh parsley or cilantro, some brown rice sautéed in a little olive oil/or angel hair boiled then fried in a sauce pan with olive oil or butter, flavored with  garlic powder and three way cheese.....  under $8.00.  I know some people on here will try it and love it. 
Mar 25, 2013 12:07PM
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I wish the term "Obamacare" would go away. I stopped going to Lone Star Steakhouse because I found it offensive that the waitperson sat down at my table and acted like she was my best friend instead of a total stranger. Not being snobby here but when I go out to eat I want food and good service, not new friends that really do not care about me.  Darden needs to really look at their business model and modernize it. You are not going to succeed if your working with an '80s plan and selling the same crap everyone else is. Going to a higher standard works better every time.
Mar 25, 2013 12:57PM
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Haven't stepped foot in the place since they took out their political frustrations on their full time staff. 
Mar 25, 2013 10:39AM
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The only restaurant chain worth eating at is the Ninety-Nine. Only for quick, inexpensive yet tasty fair.

 

If I chose Italian, I to an Italian restaurant!

 

If I chose steak, I go to a steakhouse!

 

If I want seafood, I go to a seafood restaurant, and here on the northeast seacoast you'd be a fool to dine at a seafood chain. In fact there was a Red Lobster that opened years ago in Newington, NH (right on NH's seacoast). It did not last long amidst the plethora of Lobster Houses and other fine seafood restaurants.

 

Gee Darden, that should have been a no brainer! 

Mar 25, 2013 1:19PM
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The problem with this company is that the food continues to get cheaper and cheaper, especially at Olive Garden. I don't remember Olive Garden food being so disgusting back in the 90's. Darden's only acquired Longhorn in 2007, I wonder how long it will be until their food is in the gutter.

The formula for a successful restaurant is not that difficult. Good quality food for a good price. That doesn't mean it has to be super cheap, just need to be competitive for the level of quality..

Mar 25, 2013 12:12PM
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the common thred with these chains.....their food sucks (olive garden salad and breadsticks excluded)  Frozen Lassagena you get at Costco is WAY better then what you get at Olive Garden.

 

mix in the higher cost and small portions.    sometimes people settle for a crap meal.......usually there is a Crap meal price to go along with it.    i think it became and issue when people started  forking out top dollar for this garbage.

Mar 25, 2013 1:09PM
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The only reason why this corp is failing is notdue to recipes it is do to ripping off the public.

A couple weeks ago a friend and I went to Olive Garden for dinner. He ordered a chick mango dish and I ordered Seafood Alfredo!

 

His chick was over cooked to the point where we both thought it had been reused and themango was far from ripened!

 

And although my Alfredo tasted good I was appauled that all the seafood in this dish was 6 tiny salad shrimp and 4 bay scallops---yet this dish cost me almost $18 for a dish that cost them under $1. What a rip off and no we will never go back to Olive Garden!

Mar 25, 2013 12:47PM
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They should have stayed out of politics. I will NEVER eat at any of their joints again!
Mar 25, 2013 10:28AM
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Many of those higher end franchise restaurants aren't that great.The best franchise I like is Texas Roadhouse,and Cracker barrell.All of the other ones I stay clear of.But thats my preference.
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