Inside Wall Street: Is Red Lobster cooked?

Discounting and promotional efforts fail to boost the prospects of parent company Darden Restaurants.

By Gene Marcial Jul 30, 2012 1:18PM

Image: Family at diner (© IT Stock Free/SuperStock)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.      

Tags: DRI
Jul 30, 2012 2:36PM
The real problem is people are sick of the crappy food offered at these establishments by underpaid, unskilled kitchen staff. End the conglomeration of restaurants and let real mom and pop restaurants take over again. People will get better food for a reasonable price because there won't be stockholders to worry about. These chains spend more on dividends than they do on food.
Jul 30, 2012 3:50PM
What is wrong with so many chains is that the are owned by investment groups, people who don't know food, don't know the restaurant business and don't really care about anything but making as much money as they can, then getting out and leaving the mess.
Jul 30, 2012 3:02PM
The hell with nationwide chains......need to bring back mom and pop restaurants!

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.
Jul 30, 2012 2:24PM
Darden needs to do a mystery shopper deal at Red Lobster and Olive Garden-both concepts suck---The service at Red Lobster is poor, the food is not good, and it is over priced.  Olive Garden isn't Italian-so they would be well served to either shape them up or ship them out....Just sayin'....
Jul 30, 2012 3:53PM

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!

Jul 30, 2012 11:49PM

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.

Jul 30, 2012 3:37PM
This site needs to do something about the low life spammers that are constantly present.
Jul 30, 2012 3:14PM
Red Lobster used to actually have tasty menu items. Now it is so lame, not too mention way over priced. The lobster comes out over-cooked, the shrimp dishes are always over done, items like the stuffed flounder are way too small in size. I mean the list goes on, and on. When a tab for 3 people is almost a hundred dollars, especially for the inferior food they serve, one is compelled to dine where the food actually tastes good and is more affordable.

Red Lobster was my first job when I was in high school. I remember when their food was delicious!
Jul 30, 2012 11:35PM
Prices of lobster from the fisherman are at an all time low.  Prices at Red Lobster are at an all time high and keep going up.  Just doesn't make sense.
Jul 30, 2012 4:03PM
Everyone is mentioning the Red Lobster has terrible service... I used to work there and I can tell you why - it has nothing to do with the experience or skill or the server. Red Lobster cuts staffing costs by having the waiters prepare half of your meal. They do not have a salad or desert line in the kitchen; the wait staff has to prepare all of the salads and desserts for their tables which is very very time consuming. Because of this, each server at RL is forced to have a much smaller section of tables than they would normally have at another restaurant, and their daily take home pay is greatly reduced. The service sucks not just because the waiters are terribly busy running around trying to serve you AND prepare your food, but they also have very little incentive to do a good job because the pay is never really worth it anyways. Needless to say, I only worked there for 6 months before I hightailed it out of there and went to a nice place where I did half the work and made more than double the pay.
Jul 30, 2012 11:37PM
Eat support local businesses that way, and the food is fresh; not pre-packaged. I've had it with chain restaurants!
Jul 30, 2012 3:35PM
Why anyone would pay $15 to $20 a plate at either one of these chains is beyond me, plenty of mom and pop places that charge that or less while offering a better product and customer service. High unit chains like this have lost sight of what made them big in the first place, try someplace new!
Jul 30, 2012 2:51PM
I agree Red Lobster's food isn't that great and the service is poor. I don't know what Olive Garden is trying to do, but it needs to take a step back and reevaluate its plan, because it is not working.  The last time my wife and I went to Red Lobster, the restaurant was half full and they had a line in the lobby, we left. Totally unacceptable.
Jul 30, 2012 2:30PM
Now I know why I recently received an email from Red Lobster with a coupon for $10 off two dinner entrees - in the past it was only $4 or $5 off. Unfortunately, I probably won't use the coupon since their entree prices are too high! However, I do love their cheddar bay biscuits. I wish them luck.
Jul 30, 2012 3:45PM
Red Lobster...not a good bang for the buck, still stuck in a 15 year old outdated high price menu

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 .

Jul 31, 2012 7:48AM
I don't think Red Lobster & Olive Garden are losing their appeal......the prices have just gone through the roof the last couple of years. For example, OG's Linguine & shrimp dish, you get a huge plate full of noodles with about SIX pieces of shrimp. That is my husband's favorite, but there is just not enough shrimp & way too many noodles for the $16.99 price. We don't go there near as often any more because of the higher prices. RL has only gradually raised prices. We've seen the Ultimate Feast go from $18.99 about ten years ago, to $25.99 within the last two years. Instead of rasing prices, couldn't they try smaller portions. that would save them a TON  of money in the long run. Just my thinking. Have a great day everyone!
Jul 30, 2012 2:59PM
I'm a native Floridian who has grown up on good, local seafood. But living elsewhere, I've gone to Red Lobster in desperaton for seafood. The shrimp taste farm raised, not as tasty, and bland. The service was so-so and the entries were not value priced. And they've gotten worse, so whatever changes they made in recent past was for money not quality. Too bad, hate to see employees lose jobs.  I miss the "mom and pop" restaurants there were more prevalant in my youth (I'm a baby boomer).  Some of the chains are good, but I'd like to see my individual, locally grown restaurants here. Miss the variety and better quality.  
Jul 31, 2012 4:45AM
A neighbor kid worked at Olive Garden and he told me everything served there came frozen except for the salad and the soup. That was the end of it for me. He unloaded the trucks. The service is bad at these places because the people who frequent these places are cheap tippers, or don't tip at all. They use the coupons and tip on the discount, if at all. I know kids who have worked there. After the kids are trained, they move on to better places. Olive Garden and Red Lobster have free tables, but no staff to serve them, that is why you have to wait to be seated. People go for the all you can eat specials. That is fat America for you. I dumped my Darden stock over a year ago, and when I eat out, I eat local to keep the small business man/woman in business. Usually, their food is fresh, and not frozen.
Jul 31, 2012 1:49PM
Red lobster is overpriced for the quality of food. Families can't afford to go there and singles with more dollars to spend prefer higher quality.
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