In an ever-changing world, isn't it nice to have a few things that are reliably constant? You know, Stonehenge, Old Faithful, a pennant-winning Yankees team. Not if you are a shareholder of Darden Restaurants (NYSE: DRI ) who knows of an equally predictable occurrence: continued underperformance at Red Lobster. Unfortunately, fiscal year-end numbers released after the bell yesterday show few indications of a reversal.
Fourth-quarter earnings fell to $53.7 million, or $0.32 per share, from $61.1 million the year before. However, much of the shortfall was attributed to charges stemming from store closures and write-downs, which when taken out of the picture leave a healthier bottom line: net income of $76.7 million (or $0.46), a 31% jump over last year and two cents ahead of estimates. Expenses also declined across the board (except for labor, which rose 105 basis points as a percentage of sales), driving double-digit increases in operating income. For the full year ended May 30, adjusted earnings grew 14.5% to $1.50 on a 7.5% rise in sales to $5 billion.
As usual, Red Lobster gained little traction. Fourth-quarter revenues grew a scant 1.3% to $652.8 million, despite the help of an extra operating week and the addition of seven new stores. Comps for the period fell 6.4% and suffered a full-year decline of 3.5%.
Seafood lovers must have jumped ship in favor of Italian cuisine. Same-store sales at Olive Garden rose 5% during the quarter, the 39th consecutive quarterly increase. Full-year revenues jumped 11.1% to a record $2.2 billion.
The flagship chains' younger siblings sometimes get lost in the shuffle, but are growing up nonetheless. Thirty Smokey Bones sports-themed barbecue restaurants were opened last year, with a similar number on the way in fiscal 2005. Expansion has slowed at the Caribbean-style Bahama Breeze chain, but the $5.2 million average annual sales per store is the highest of any unit in Darden's portfolio.
With 1,300 stores, Darden is the undisputed king of casual dining, but there is no shortage of rivals vying for the crown. Applebee's (Nasdaq: APPB ) has had a great run lately, and Outback Steakhouse (NYSE: OSI ) , Brinker International (NYSE: EAT ) , Ruby Tuesday (NYSE: RI ) , and Landry's Restaurants (NYSE: LNY ) are all worthy contenders.
Darden has a significant head start, however, with further expansion in the works. True, Red Lobster's protracted struggle is a major short-term obstacle, but fortunately strength elsewhere has picked up the slack. The chain still enjoys a dominant 50% seafood market share, and an experienced management team is now in place. The company is somewhat sanguine, forecasting a 1% to 3% rise in both Red Lobster and Olive Garden comps this year, along with an 8% to 12% increase in overall earnings. Hopefully, the cautious optimism is warranted; Red Lobster cannot remain stuck in neutral indefinitely.
Here are more thoughts on Red Lobster's slowdown:
In spite of its troubles, Fool contributor Nathan Slaughter counts Red Lobster among his favorite eateries and could survive on the cheddar-bay biscuits alone. He owns none of the companies mentioned.
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