Inside Wall Street: Is Red Lobster cooked?
Discounting and promotional efforts fail to boost the prospects of parent company Darden Restaurants.
Darden Restaurants (DRI), the parent of such leading eatery chains as Red Lobster, Olive Garden, and Longhorn Steakhouse, is the world's largest publicly held casual dining restaurant company. It's big in promoting its strong-value offers, menu improvements, and the diversified approach of its brands. And, indeed, the branding of its various restaurant chains has won widespread attention.
However, such efforts haven't prevented the industry leader from slashing its earnings forecast for 2013, suggesting to Wall Street that the coming fiscal year will be sluggish and a drag on overall growth.
And the recent all-cash deal to buy San Francisco-based Yard House restaurant from TSG Consumer Partners for $585 million -- expected to be dilutive to its current-year earnings -- didn't help reduce Darden's burden.
"Stiff competition resulting in higher discounting rates, failure of some promotional offers, probability of higher operating expenses, as well as cautious consumer spending, will add further woes to the worry," cautions investment research firm Zacks, which downgraded Darden to "underperform," or "sell," from a "neutral" rating.
The recent traffic problems at Darden's two core brands, Olive Garden and Red Lobster, continue to nag the company, notes Zacks in a report.
Darden, which owns and operates 1,994 restaurants as of May 2012, recently lowered its per-share earnings guidance for 2013, partly to reflect the dilutive effect of its decision to acquire Yard House. While the company boosted its total sales growth guidance for fiscal 2013 in the range of 9% to 10%, from the previous 6% to 7%, it cut its per-share earnings to a range of 5% to 9% from the prior 8% to 12% estimate. Other Darden restaurants include the upscale steakhouse Capital Grille, Caribbean-inspired seafood eatery Bahama Breeze, and grill and wine bar Seasons 52.
Darden's stock has been an uninspired performer so far this year, trading between $46 and $51 a share. Zacks has dropped its six-month price target to $45 a share from $49.90, which equates to about 10.2 times Zacks' fiscal 2013 (ending May 31) earnings estimate of $3.84 a share on projected revenues of $8.64 billion. In fiscal 2012, Darden earned $3.59 on revenues of $8 billion.
Underperformance at Olive Garden, Darden's full-service Italian restaurant operator, which has 792 eateries, delivered lackluster results in three quarters of 2012. Olive garden will likely pose a threat to Darden's bottom line, warns Zacks, as traffic in the chain continues to decline.
"Saturation and inability to modify itself in tune with the industry changes were responsible for the same-restaurant sales softness at Olive Garden," notes the research outfit. Results from the initiatives that Darden has adopted to boost Olive Garden's appeal has yet to be seen, says Zacks.
Darden is also trying to boost the sagging traffic at Red Lobster, the company's largest full-service restaurant chain with 704 restaurants. So far, promotional efforts to boost traffic have yet to show positive results. "Given the value-sensitive environment, failure of any promotional offer puts pressure on same-restaurant sales growth," argues Zacks.
Darden has been offering high-discount rates on menu prices to fight the impact of the economic slowdown and price wars in the industry's increasingly competitive environment. Nonetheless, those promotional moves, warns Zacks, "will likely affect Darden's long-term brand equity, business modeling integrity, and the potential to sustain profitable growth."
Analyst Jim Yin of S&P Capital IQ, who is also unimpressed by Darden's performance, rates it a "hold." He bases his rating on his cautious outlook on consumer spending and the sluggish U.S. economic recovery.
"Recent results for both Olive Garden and Red Lobster have been relatively weak," notes Yin, and "we are concerned that the brands are losing appeal with customers," adds the analyst.
Darden plans to open about 100 to 110 net new restaurants in fiscal 2013 as part of its efforts to widen sales and earnings. So far, that hasn't inspired Yin to upgrade his recommendation on the stock.
Part of the reason? Yin's forecast for Darden's same-store sales in 2013: Flat.
Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
Its the same $hit from coast to coast and I am sick of seeing the same restaurants in every city. There is no more variety! Corporate restaurants need to die and true cooks should spread their wings and branch out.
A decade or more ago, I felt like CLASS! when I took my wife out for her Birthday at a RED LOBSTER Restaurant. We were lower middle class folks and looked at the dining experience as "Special". The drinks were reasonable, the Bread Sticks delicious and the Soup and Portions were very adequate and made us tell and re-tell our dining experience in a prideful way!
About a Month ago I went to the same RED LOBSTER, was handed a buzzing, blinking device, sat at a very crowded small bar, paid ten dollars apiece for mixed drinks, had a meal that left me hungry and looking for a snack on the way home, and paid a heavy price. In my mind playing over and over on the way home was never again! My fixed lower middle class retirement check cannot take it!
Why has no one mentioned
"Its the poor economy, Stupid"
People are not going out to eat as much.
People do not have disposable income to blow on extras.
The bottom line to all of the recent decline in restaurant earnings is a simple one .... consumers are suffering like never before to stay afloat financially. Friends and aquaintinces I'd never thought would be terribly affected by the recession are hurting and cutting back on all areas of their spending ...especially when it comes to their social spending. We rarely meet for lunch or dinners any more opting to do pot luck at one of our homes. Think about it ....if you go to a restaurant like ; " Olive Garden", " Red Lobster", " Cheesecake Factory", " Elephant Bar",
"Applebees" etc. , you not only have to consider your meal will be costly, you may want alcohol and you have to pay a tip all adding up quickly . Many fast food restaurants are offering meal deals that can be eaten there or taken home and even easier ,many markets now have inside delis, Chinese foods, pizza, ready made meals ( heat and eat ) that make life easy ...and cheaper for the customer. Until we get our economy back on track with more secure jobs offered , we will see more and severe slow downs .
Copyright © 2014 Microsoft. All rights reserved.
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.