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Darden's Dragging Lobster

By Nathan Slaughter – Updated Nov 16, 2016 at 3:44PM

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The restaurant company beats estimates, but Red Lobster is still weak.

Despite the last-minute impact of Hurricane Charley, Darden Restaurants (NYSE:DRI) still managed to post first-quarter numbers that topped expectations. The Florida-based operator of chains such as Red Lobster, Olive Garden, Bahama Breeze, and Smokey Bones announced earnings of $0.44, or $72.1 million, which is a 10% increase from the $0.40 earned a year ago and a penny better than estimates. Sales rose a modest 1.5% to $1.27 billion.

Once again, Olive Garden did most of the heavy lifting, with sales that rose 6% to $580.5 million. The addition of 18 new units helped revenues, as did a 2.8% improvement in same-store sales. Comps at Olive Garden have now registered 40 consecutive quarters of growth. Though labor costs continue to climb, expenses elsewhere were trimmed, leading to record quarterly income for the Italian-themed chain.

Unfortunately, strength at Olive Garden was again offset by weakness at Red Lobster. After dropping 3.5% last year, same-store sales at the seafood chain began the new fiscal year with a 7.6% decline, capped by a 16% free fall in August. Not only did traffic suffer a double-digit drop, but also those who did visit rang up smaller tickets, as average check prices fell by 1% to 2%.

Red Lobster's revenues dropped 6.2% to $594.8 million, but last summer's endless crab promotion made for difficult year-over-year sales comparisons. As you may recall, management drastically miscalculated the customers' appetite for crab legs and was forced to watch helplessly as all those second and third helpings took a bite (pun intended) out of the bottom line.

The fiasco led to the ouster of Red Lobster President Edna Morris, and things have been downhill ever since. Darden isn't the only company to run into problems with all-you-can-eat promotions; Applebee's (NASDAQ:APPB) was recently forced to tone down its outlook after reporting an excess supply of riblets.

For the past year, Darden has been driving with one foot on the gas and the other on the brake, but there is a light at the end of the tunnel for Red Lobster. Earlier this month, diners singled out the chain as the best seafood restaurant for the 16th straight year, indicating that guest satisfaction remains high. Profit margins per guest have also been on the rise.

When Red Lobster finally does turn the corner, then Darden -- which trades at a lower multiple than rivals such as Applebee's, Brinker (NYSE:EAT), Outback Steakhouse (NYSE:OSI), and Cheesecake Factory (NASDAQ:CAKE) -- will look much more tempting.

Do you prefer designing your own culinary creations? Get some ideas for tonight's dinner in the Fool's Recipes/Cooking discussion board.

Fool contributor Nathan Slaughter counts Red Lobster among his favorite restaurants, but he owns none of the companies mentioned.

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Stocks Mentioned

Brinker International, Inc. Stock Quote
Brinker International, Inc.
EAT
$25.53 (-5.02%) $-1.35
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$122.39 (-2.44%) $-3.06
The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$28.43 (-2.44%) $0.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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