What Darden Earnings Mean for Red Lobster and Olive Garden

Darden Restaurants (NYSE: DRI  ) will release its quarterly report on Thursday, and the company behind the popular Olive Garden and Red Lobster restaurant chains has investors expecting further deterioration in its corporate earnings. Even as competitors DineEquity (NYSE: DIN  ) and Brinker International (NYSE: EAT  ) fight for dominance in the casual-dining arena, Darden has its own investors looking for ways to encourage the restaurateur to get its share price moving in the right direction again.

The restaurant industry attracts millions of diners each year, but from an investor's point of view it's fraught with peril. Low margins and finicky customers make it tough to eke out profits even in the best of times, and in tough economic times eating out is an easy discretionary purchase for Americans to pull back on. Yet for Darden, things have just gotten interesting for investors, as an activist group has proposed a plan it thinks could send the stock soaring as much as 50%. Will it help Darden beat Brinker and DineEquity or merely serve to distract management as it tries to bolster earnings? Let's take an early look at what's been happening with Darden Restaurants over the past quarter and what we're likely to see in its report.


Source: Darden Restaurants.

Stats on Darden Restaurants

Analyst EPS Estimate

$0.20

Change From Year-Ago EPS

(23%)

Revenue Estimate

$2.07 billion

Change From Year-Ago Revenue

5.6%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

What's happening with Darden Restaurants?
In recent months, analysts have cut their views on Darden earnings, reducing estimates by $0.03 per share for the quarter ended in November and full-year fiscal 2014 projections by about 3%. The stock has risen, though, climbing 8% since mid-September.

Summer wasn't kind to Darden, with its report for the quarter ended in August showing weakness in same-store sales and earnings. Red Lobster saw comparable-store sales fall 5.2% during the quarter, with Olive Garden posting a 4% decline in comps. Those results weren't entirely inconsistent with what Brinker and other competitors reported a couple of months earlier, but they nevertheless were discouraging.

One ongoing problem for Darden has been the move toward faster-service chains. Chipotle Mexican Grill and Panera Bread have been big beneficiaries of the shifting trends in the restaurant industry, with both chains boosting same-store sales even in light of Darden's poor performance. With Darden having made pricing and menu choices that have caused customers to question the value of its offerings, traffic trends show that diners are voting with their feet, to Darden's detriment.

Darden's competitors have taken varying responses to shifting trends. Brinker is pushing forward with ambitious growth plans for its Chili's and Maggiano's restaurants that it hopes could take its earnings per share up 15% or more in fiscal 2014. Meanwhile, DineEquity has moved toward a franchise model for its Applebee's and IHOP restaurants, raising expenses temporarily but leaving the company in a better position to see more stable results going forward.

But the biggest news for Darden this quarter came from activist investor Barington Capital, which took a nearly 3% stake in the stock back in October. Barington thinks that Darden should break up into separate entities, with faster-growing small chains going into one entity and Olive Garden and Red Lobster continuing in the other. Just yesterday, Barington recommended a plan that could also include spinning off the chain's real-estate holdings into a separately traded real estate investment trust, taking advantage of investors' appetite for income-producing properties with reliable long-term tenants.

In the Darden earnings report, watch for management to address Barington's recommendations and come up with a viable recovery strategy of its own. Unless Red Lobster and Olive Garden start performing better, shareholders might well start siding with the activist investor and its efforts to get Darden's stock moving in the right direction.

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Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2013, at 11:25 AM, DSmod wrote:

    When you say, "...to get Darden's stock moving in the right direction," you make it sound like it's been falling. Guess what, the stock was at $45-46 in late Sept./early Oct. Now, two months later, it's above $52. Not only that, but since early 2009, this thing is up by more than 100% - i.e., it's ALREADY BEEN moving in the right direction! I would argue somewhat undeservedly. Let's be honest: Red Lobster smells like grease and rotten fish, Olive Garden is about as authentic Italian as Mickey is a Mouse, and the other brands aren't much more inspiring. The only one I've seen trying to keep up with modern food trends in Season 57 with it's focus on quality ingredients and truly decent preparation. But that's a small small part of their business.

  • Report this Comment On December 18, 2013, at 3:23 PM, Howdie wrote:

    Not sure why Olive Garden and Red Lobster come up in the news almost every day. But I'll say it again--

    The USA would be a better place of these banal, boring, middle-of-the-road common-denominator chain restaurants infesting every strip mall in the USA would just GO OUT OF BUSINESS.

    Let independently-owned, unique, and soulful restaurants open in their place.

  • Report this Comment On December 19, 2013, at 9:59 AM, pondee619 wrote:

    "Olive Garden and Red Lobster are struggling, with comps respectively sliding 4% and 5.2% in Darden's latest quarter. If the chains are struggling to draw diners now, what will happen when prices move higher and the marketing message goes away?"

    Perhaps, the problem lies not with the message, or the amount thereof, but the fact that both Olive Garden and Red Lobster are mediocre, at best, and not inexpensive.

    There are a multitude of Mom and Pop Italian Resturants where the food is vastly better than Olive Garden.

    Red Lobster still serves pre-frozen reheated seafood often times served in the aluminum foil package in which it was frozen. More properly served in front of a TV. Good seafood is hard to come by. Red Lobster is proof.

    The problem with Darden is that their two headliners are neither good nor cheap. It is too easy to find a better alternative at which to dine.

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