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 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
It's not rocket science Darden.
That is the last place anyone with money or knowledge would want to go for good seafood.
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.
Just remember their sea food comes from china. That's why I don't eat there anymore.
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.
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.
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 !
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.
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