Darden leaves a bad taste in investors' mouths

The company has struggled since the recent economic slowdown as cash-strapped consumers decided to eat out at cheaper fast-food restaurants or not dine out all.

By MSN Money Partner Oct 11, 2013 9:48AM

By Jonathan Berr

 

Are two Darden Restaurants (DRI) better than one? Activist investor Barrington Capital Group sure thinks so.

 

The hedge fund is urging the company to create one company with its Olive Garden and Red Lobster casual dining chains and another with its higher growth, fancier establishments such as Capital Grille and Bahama Breeze, according to media reports.

 

Like other casual dining chains, Darden, which owns 2,100 restaurants in North America, has struggled since the recent economic slowdown as cash-strapped consumers decided to eat out at cheaper fast food restaurants or not dine out all. Darden has tried to win back consumers with gimmicks such as unlimited bread sticks, but these tactics haven't worked as well as Darden hoped -- as evidenced by a recent awful earnings report.

 

Net income in the latest quarter plunged 37 percent to $70.2 million, or 53 cents per share, missing Wall Street expectations by a whopping 17 cents. Revenue rose 6.1 percent to $2.16 billion, below the $2.2 billion consensus forecast. Even worse, expenses grew at a much faster rate than sales, surging 9.6 percent to $2.07 billion.

 

The company was hurt by the dismal performance of its two largest chains, Olive Garden and Red Lobster. Sales at Olive Garden, Darden's biggest measured by revenue, fell 4% at locations open at least a year. Red Lobster plummeted 5.2 percent. The higher-end chains, meanwhile, did better, posting a 0.5 percent gain.

 

Olive Garden restaurant in Huntington Beach, Calif. (© Jae C. Hong/AP Photo)The woes of Olive Garden and Red Lobster aren't going to end soon. Darden expects same-restaurant sales in the current fiscal year to be flat at the chains, along with the Longhorn Steakhouse locations.

 

Darden has announced plans to slash $50 million annually, eliminating 85 jobs and making changes to its supply chain. But Barrington wants faster cost cuts and for the company to unload some of its real estate, according to the Wall Street Journal.

 

So far Darden and Barrington Capital are playing nice.

 

A company spokesman is quoted by the newspaper as saying Darden "welcomes input on enhancing shareholder value" and that the board will thoroughly review Barrington's proposal. Barrington, for its part, told the Journal, "We believe that Darden has the potential to deliver significantly higher returns to shareholders."

 

Whether this diplomacy will last is hard to say.

 

Many on Wall Street are not as excited about Darden as Barrington. The average 52-week price target on the stock is $50.78, about where it currently trades. Darden does offer an attractive dividend, yielding a fat 4.7 percent yield. But If the company's struggles continue, the shareholder payout may be cut.

 

The shares are trading at a price-to-earnings multiple of 12.6, below the 17.6 valuation of McDonald's and well below Burger King's 44.3 figure, but this stock may be a value trap. Darden, like McDonald's, has spent so much time convincing consumers that its food is cheap that they have cheapened their brands in the process. It's a perception that won't be easy to change.

 

The risks of owning Darden seem to outweigh the rewards.

 

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Tags: DRI
37Comments
Oct 11, 2013 10:41AM
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Your food tastes like crap, overpriced crap. Really, you've gone to cost cutting so badly, that now your foods are boiled in bags. I can do that at home, for a lot cheaper. Try using fresh ingredients, that's what brought home the bacon, for the company.
Oct 11, 2013 12:25PM
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I have Boycotted Olive Garden for life after they refused to let a group of Vets that had reserved a room put up ther American Flag.

 

FU Olive Garden!

Oct 11, 2013 10:59AM
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What? Investors are worried about falling sales? They love the oil companies falling gas sales (down about 10% since 2007). Oil stocks are way up. Why doesn't Darden just quadruple prices like the rip-off oil companies have for gas? Answer: Restaurants can't raise prices easily because restaurants have real competition, unlike the oil companies who dictate price under a monopoly with no competition, just the way they planned it.
Oct 11, 2013 10:42AM
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No one want to eat fake italian- That HOSPIALLYCRAPOLLA the 'olive pit' spews out will only lead to the company's demise. And the 'DEAD LOBSTER' ? Well it might be  a half step up from the other but it sure won't bring the customers in who want GOOD SEAFOOD ! (R.L> used to be a good, mid level restaurant back in the late 70's, early 80's)

 

And the staff will sing: FROM THE PASTA WE BURN, TO THE TIPS WE DON'T EARN - OH WE WISH WE NEVER WORKED HERE !

 

Oct 11, 2013 10:40AM
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Aren't these the folks that lied about the ACA so that they could continue not paying for health insurance to their employees?  Perhaps consumers took notice and decided to eat other places.

Oct 11, 2013 11:42AM
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Bahama Breeze is upscale? What have we become???
Oct 11, 2013 11:41AM
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Cook at home and take turns going to your friend's house.  Who knows what the hell Darden or most restaurants are doing to the food.
Oct 11, 2013 12:36PM
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"...cash-strapped consumers decided to eat out at cheaper fast food restaurants or NOT DINE OUT ALL..."

Apparently not only has the restaurant business suffered from the poor economy, so too has the journalism business. MSN, CNN, and FOX are only able to afford "journalists" and "editors" who do not possess grammatical skills beyond that of a high school education and are either unable, unwilling, or inept at the use of spelling and grammar checkers before posting an article.
Oct 11, 2013 1:08PM
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The last two times I have eaten at Darden restaurants (Red Lobster and Olive Garden) I became ill.  Not to mention both times the services was terrible.  Found out later it was the lettuce in the salads.  Will never go back to either place.
Oct 11, 2013 12:51PM
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Great product, but filthy dirty restaurants with naive employee's and management that doesn't care about customer complaints. I'm talking to YOU in Citrus Heights, CA.
Oct 11, 2013 3:17PM
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Just A Thought,

    The chain restaurants are just that ....chains. Generally, some are wholly owned by the parent company and the rest by individual franchisees, so consistency can be difficult. The bottom line is that if one wants to dine on some genuine authentically prepared foods, whether it be seafood, Italian, Mexican, Chinese or anything else ....try to patronize one of your better locally owned and operated family restaurants. You may or may not pay just a bit more, but most of them take great pride in the quality of their food and service and really want you to be satisfied to return again. Peace to all ~

Oct 11, 2013 2:44PM
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All you have to do is look at the clientele of a restaurant.  If you go into a restaurant during a busy time and it's 80% ghetto customers then you know it's time to short the stock.
Oct 11, 2013 2:23PM
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I eat my main meal out every day. Red Lobster use to be my favorite.  Yes I said use to go there twice a week.  I quit because I ordered Lobster and it was terrible.  NO BUTTER  yes they use a yellow colored oily substance.  Oh god its awful.  Shrimp Scampi is the same no more butter.  Cold baked potatoes.  Why?  It is not that hard to serve hot food with butter. I took two elderly ladies and myself there for 11 years but no More.  Darden go to Wisconsin they sell the best fresh butter on the planet.
Oct 11, 2013 2:18PM
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Used to love RED LOBSTER!  now the ultimate feast is the ulimate RIP-OFF.  portions are small and if it wasn't for the biscuits and salad I would leave hungery.  Did the all you can eat shrimp deal acouple weeks ago and all I can get is 2 different with my meal.  so I eat two and then wait another 20 fricken minutes to get 6 more shrimp.  If I stayed and had 2 more portions I would have been at the restaurant for another hour!   Go out and f%ch-up a good thing.  I would have rather them keep the old portions and raised the price, then to short change me leaving a bad taste.  if it's not broken do not fix it!

 

TGI Friday used to have a fabulous menu made from scratch...and now if is a menu of gargabe!

Oct 11, 2013 1:27PM
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There are several Red Lobster restaurants in my area that I can get to in a reasonable amount of time, but I only go to 2, and can't go very often because of the wait. The ones where the food is a little better, and the service is good were promptly overrun and infiltrated by the blacks from detroit who make a day trip out of coming. You have to choose very carefully what time you go to either of them, because you will wait at least an hour, while the whole waiting area and outside is filled with blacks. Once you get in, they are already in there eating, screeching, and complaining how the food doesn't look it does on TV, in order to coerce the waitresses into bringing them more food for free. Even these restaurants are hit or miss in terms of food quality. I was there a week ago, and the Walt's shrimp, which is the more expensive, supposedly better shrimp, was mushy and over-cooked. Olive Garden is the worst Italian food around. If I am going to a chain restaurant for Italian, I will choose Carrabba's, hands down. Fortunately, there are many non-chain Italian restaurants in my area that blow away Olive Garden, so I don't ever go there. The food and service are terrible, and in this area, you can't get in on a Sunday for at least 7 hours because of all the blacks coming from church. It's not worth the bother, anyway. Bahama Breeze is garbage, plain and simple. Will never go again. I personally have not gone to Capital Grille, but the one in our area is getting ready to close. The few people I know who have gone have hated the food and the service, and I have been told it smells in there. One girl I know got sick after eating there, and her boy friend told me that it was too expensive for the portion sizes. It is not rocket science when it comes to restaurants: It doesn't matter what Chef Irvine says. You have to have a decent portion size of GOOD food for a GOOD price. Why do you think all the local, family-owned restaurants are doing so good?
Oct 11, 2013 12:58PM
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We have an Olive Garden and Red Lobster a mile apart on our side of San Jose so we go to both. Recently the service has become so bad a Olive Garden that we have now boycotted them indefinately. We will go to Red Lobster this afternoon. Their service is still goo d and so is the food. We do have lots of other choices here so we are not captive. Bebop Bill
Oct 12, 2013 10:59AM
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Maybe it's the area. I was recently in Lacey, Washington at Red Lobster.  I was greeted at the door from the Hostess and promptly shown to my seat. I ordered the Captains Platter to try the different selections. Everything was cooked well and very tasty. I couldn't get enough of the clam chowder! My wife and I liked the herb cheddar biscuits. The service was GREAT! The table next to us had a birthday and the crew sang happy birthday with the Hostess doing a wonderful solo that was worthy to be a contender on American Idol! The waitress was also very friendly and saw to our every need. I also went to the Olive Garden in Olympia.  Had a little bit of a wait but they were very busy at that time. The staff was very friendly and my wife and I enjoyed the salad and breadsticks. We also ordered the alfredo sauce to dip the breadsticks in and it was great! The stuffed mushroom appetizers are a must. I also had the raviolis and they had no problem putting them in the sundried tomato sauce instead of the marinara. They were delicious! All in all we had great experiences at both locations.
Oct 11, 2013 3:12PM
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Just finished readng SNOPES regarding Olive Garden and the American Flag.  You might want to read their apology and their explanation.  Might change your mind.
Oct 11, 2013 5:26PM
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Why would anyone eat at restaurants that so dis middle-class Americans by under paying their employees and saying "we're going to cut employee hours so we don't have to pay for healthcare"! Who wants to eat at restaurants with sick workers?
Oct 11, 2013 3:05PM
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Never been to an Olive Garden restaurant and if "impeach Obama 71" is correct with the comment on Vets, I never will  !!!!!!
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