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.
i have always heard that the olive gardens food,and service is awful.and i have heard the same thing about red lobster,which explains why they are doing so poorly,the company should either improve them,or close them.
I stopped eating at Red Lobster about two years ago when we received abismal customer service. The hostesses were rude, and they made us wait for a table after seating someone they "knew" who came in an hour after we did. The food at both Red Lobster and Olive Garden is frozen or boil in a bag fare and tastes that way... stop giving money to big corporations and support the local restaurants that actually care about who and what they serve.
bring back the good yeast rolls at Olive Garden, and be more competitive in your pricing......after all, you're selling spaghetti !!!!!
When a once-successful business runs into trouble, it should return to what made it successful in the first place.
It's not that difficult.
They started going to smaller portions and cutting other things from the meals but kept the same prices.
I quit going there several years ago after I got tired of it and I say that if they want to treat people like that then Good Riddance!!!
come on people its a chain store , you mite as well be going out to eat at wal-mart ,,,,no personal service, they just run ya thru like cattle.....give me a good ol family owened and operated steak house any day...
Maybe if they let you enjoy your soup or salad before bringing you your entree so that it sits and gets cold or you have to hurry your soup and salad. I;ve asked them to hold that part of my order and thry did they did and brought it later after it had been sitting in the kitchen and came out on a cool plate which is supposed to be so hot it could burn you, Just take our orders as we want after all we are the customers you are supposed to be catering to.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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