Red Lobster in hot water

Owner Darden Restaurants says the seafood chain is underperforming and wants to sell it. Could a new buyer turn it around?

By Benzinga Dec 20, 2013 3:41PM

Customers walk into a Red Lobster restaurant in Hialeah, Fla. on Sept. 6, 2012 (© Alan Diaz/AP Photo)By Jim Probasco


After reporting a second-quarter profit of 20 cents a share, in line with the consensus, and revenue of $2.05 billion, short of the $2.07 billion consensus estimate, Darden Restaurants (DRI) says it wants to sell or spin off its 705-restaurant Red Lobster chain.


Although Red Lobster has been a weak performer of late, it is also the restaurant chain on which the Darden empire was built. Following the announcement to dump Red Lobster, S&P Ratings placed Darden on Creditwatch.


Although Darden did not say how the separation would be done, it did reveal in its earnings call Thursday that Red Lobster has failed to attract the number of higher-income diners that both Olive Garden and LongHorn Steakhouse have.


The Wall Street Journal speculated that this factor might be a reason Darden failed to follow the advice of activist investor, Barrington Capital, which wanted Darden to split the company into three parts -- one of which would consist of Red Lobster and Olive Garden.


In explaining the company’s decision to divest itself of Red Lobster, Darden CEO Clarence Otis said, "Red Lobster and the rest of Darden have significantly different sales and earnings growth prospects."


Statistically, it wasn't even close.

Last year, Olive Garden had 11 percent more visits from diners with household income over $100,000 than five years ago. For LongHorn Steakhouse, the increase was 50 percent, while Red Lobster saw virtually no increase in wealthier diners at all.


As one of the biggest casual-dining companies in the business, Darden has been under pressure for some time to come up with a plan to reinvigorate itself. The company has a market value of $6.7 billion, but suffers from lack of growth.


In addition to dropping Red Lobster, Darden said it would halt expansion of the Olive Garden chain and pull back opening new LongHorn Steakhouse locations.


The company also said it would stop investing in new brands.

In addition to calling for Darden to institute a three-way split in its operations, Barrington also said the company should aim for $100 million in cost savings. Darden had set a target of $60 million, according to The New York Times.


Although Barrington was not pleased that Darden didn't follow its advice, some analysts were more positive about Darden's announced efforts. David Palmer at RBC Capital Markets, in a client note, said the moves represented "a more shareholder-friendly strategy." Palmer did caution that Darden had made some big promises and might not be able to deliver.


Meanwhile, Wells Fargo suggested Friday that Darden's stock, which closed Thursday at $51.02, was worth about $56 per share. Wells Fargo maintained an "outperform" rating on Darden.


At the time of this writing, Jim Probasco had no position in any mentioned securities.


Read more from Benzinga

581Comments
Dec 20, 2013 5:01PM
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Fact is: Red Lobster is marginal, over-priced seafood. The poor and middle-class can't afford to eat there and higher-wage earners choose to eat at better places.

It's not rocket science Darden.

Dec 20, 2013 4:50PM
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Red Lobster has a long standing reputation for unfresh seafood covered up with butter and bread crumbs.
That is the last place anyone with money or knowledge would want to go for good seafood.

GOOD RIDDANCE

Dec 20, 2013 5:45PM
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All these comments and not one question as to HOW THE HELL DO THEY KNOW WHAT MY INCOME IS?  Courtesy of the NSA I suppose.
Dec 20, 2013 4:49PM
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Red Lobster sucks that is why people of higher incomes don't go there. If you want freshly prepared seafood of top quality Red Lobster would not even be considered in my mind.
Dec 20, 2013 5:05PM
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I can heat-up my own food at home, I don't need to visit a Red Lobster or Olive Garden to have frozen food heated up. If I go out for dinner, I want something made fresh. I put Red Lobster at the same level as a McD's of seafood.

 

Got served undercooked fish, won't be back.

Dec 20, 2013 5:15PM
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Just remember their sea food comes from china. That's why I don't eat there anymore.


Dec 20, 2013 5:07PM
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We are a family with Maine seacoast roots, so your chances of ever finding us at a Red Lobster are pretty close to zero.  Where we live there are tanks full of live Maine lobsters.  Most of you can boil water.  So if you can get past putting a green crustacean into a pot of boiling water ( and in that regard please watch Annie Hall" before you do) please consider cooking your own. Pretty easy to melt butter.  Good strong kitchen kinfe to do a little cracking and splitting and have at it.  Get some lobster bibs, a bag of Cape Cod chips, and enjoy.
Dec 20, 2013 5:29PM
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Olive Garden sucks much worse than Red Lobster although you can tell both chains are owned by the same company.  Whoever oversees Longhorn has their stuff together.  This is all an upper management problem.  Rather than sell Red Lobster, why not fire the corporate staff that dictate how it's run and hire some smart people.  You can take Olive Garden to the landfill.  It is awful!!! 
Dec 20, 2013 5:10PM
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Red Lobster stinks.  Their plates do not match the photos in the menu, the seafood is not fresh and crunchy or solid, its mush and soggy.  Their version of grilled is burned.  If you complain the waitresses get ticked off and their service gets worse. They tell you it's a 6 ounce lobster tail and it comes out 3-4 ounces.

 

Good bye Red Lobster, wont be missing you.

Darden is a terrible company to deal with or work with, they do very little to support small business and they are not active in their local communities.

Dec 20, 2013 5:34PM
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Red Lobster is just one example of "corporatized" food establishments that rely on freeze dried, flash frozen, and instant food products disguised as gourmet faire.  Sorry but that is just the reality of American dining today.  If there are more than one of the place you are eating at chances are very good that some corporate nabob has dabbled with the original concept and made a mess of it. 


Personally I don't like chain restaurants but to be honest there simply aren't many options anymore.  Most of the 'mom & pop' places have been driven out of business by these tomain palaces in much the same way that the mega-stores have destroyed the local retail businesses.  They win us over with cheap imitations and low prices and we blindly fall for it thinking we are getting a deal when In fact we are being set up for the kill and finally fed less than desirable food stuffs just because that is all you can get once the competition is driven out of business.   

Dec 20, 2013 4:51PM
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Went to Red Lobster last night - They have remodeled  - put in booths and took away the nice large tables.'

I asked the Hostess to sit us up front as my father in law is 91 and cannot walk very well. Even though they were empty they sat us in the very back of the restaurant at a booth!

 

The shrimp I had was greasy and not cooked properly. We will not be going back !

 

A pity because this was our favorite restaurant  !

Dec 20, 2013 5:26PM
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 I quit going in there years ago, high prices, microwave meals, usually slow service. You can do better for your money elsewhere..
Dec 20, 2013 4:48PM
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Last two times @ red lobster sucked for me. Won't be going back.

Dec 20, 2013 5:38PM
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Red lobster used to be pretty good, but in the last couple of years their food has really gone down hill. Now a lot of the food reminds me of stuff you can get in the frozen food section at the grocery store. I think they're serving less as well.  Olive Garden isn't much better. The food isn't horrible, but for the price it's not really worth it anymore. Red lobster is probably on its way out. 



Dec 20, 2013 4:59PM
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Red Lobster is better than Long John Silvers. (if you can't say anything nice......)
Dec 20, 2013 5:01PM
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If you ever get back into the kitchen of one of these places, you won't be eating out much.

There are all kinds of pre-packaged ingredients premixed with artificial flavors and hydrogenated compounds.   Hmmm --- maybe we have some culprits for our healthcare problems.

Dec 20, 2013 5:20PM
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proving again no matter how you spin the dinning-out experience, frozen seafood is frozen seafood.
Dec 20, 2013 5:23PM
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WAY, way overpriced, mediocre food, horrible service at every RL I've been to over the past 10 years.  No wonder they're circling the drain.  See ya....
Dec 20, 2013 4:52PM
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     THEY CAN DO WHAT THEY WANT.  LAST TIME I EAT THERE WAS 20 YEARS AGO AND I WASN'T IMPRESSED AT ALL.   GIVE ME A GOOD O SOUR DOUGH JACK, OR EAT AT LONE STAR.
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