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 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.
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.
More from Top Stocks
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!
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 !
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.
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.
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 ~
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!
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.