Things don't appear to getting any better for Darden Restaurants (NYSE:DRI) and its Red Lobster chain. The endless promotions and new menu items still can't bring customers back to its restaurants. In the first quarter, Red Lobster was the worst performer among Darden's restaurant brands with a drop in comparable- restaurant sales of 5.2%. Can Red Lobster be turned around or should Darden Restaurants throw the chain overboard?
Which press release to believe?
Things have gotten so bad for Red Lobster that the fictional news source The Onion has gotten in on the act with its fake news headline, "Red Lobster Welcomes Back Defrosted Shrimp Days." In the article, it says that Red Lobster is breaking open the cold storage freezer to melt the freezer burn off its shrimp. Ouch!
It says customers can also try the restaurant's signature twice-reheated bread-sticks or room-temperature Portofino Seafood Bake. The Onion further gets in on the act by saying that "customers should act fast because the promotion only lasts until Jan. 1, 2014, after which the restaurant will transition to its Leftover Shrimp Fiesta."
This Fool can easily see how The Onion would come up with its story. Red Lobster's latest promotion is "Red Lobster's Crabfest is Back for a Limited Time." Red Lobster's promotions almost always encourage diners to go to the restaurant before supplies run out or the company changes its menu again.
I think this type of marketing campaign is wearing thin on its customers. Red Lobster needs to focus on its core menu...not on its constant promotions. At the heart of The Onion's story is that Red Lobster is no longer fresh and the quality of its food has gone down. Red Lobster needs to focus on freshness and improving its core menu.
Speaking of which
What's up with pork chops on the menu? When I go to Red Lobster, I want seafood. Red Lobster wants to be all things for all people by adding non-seafood items to its menu. In addition to pork chops, there's chicken pastas, maple-glazed chicken, wood-grilled chicken, and steak. This appears to be a pattern for Darden Restaurants as it's doing the same thing over at Olive Garden, which you can read about in "For a Burger, Head to Olive Garden?," a recent article.
Not going to help with the competition
While Red Lobster is the largest casual-dining seafood chain with more than 700 locations, it's facing stiff competition from Joe's Crab Shack, which is part of Ignite Restaurant Group (NASDAQ:IRG). While Red Lobster is losing customers, Joe's Crab Shack is gaining them. In its most recent quarter, Joe's Crab Shack posted a 3.3% rise in comparable-restaurant sales.
I see two main reasons why "Joe's Crab Shack Is Eating Red Lobster's Lunch." For one, the menu at Joe's Crab Shack appeals to its customers and the food is known for being fresh. Second, its "100% shore" campaign is really resonating with consumers. Joe's is letting its customers know that they'll get the coastal experience when they go there, regardless if they live away from the shore.
What's Darden Restaurants to do?
Shares of Darden Restaurants have lagged the market in the past year by rising only 12%. Activist investor Barrington Capital has taken note and the firm is pushing for a break-up of the company.
Darden also owns LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's, Yard House, and its crown jewel, Olive Garden. Barrington proposes that Olive Garden and Red Lobster become one company, while the other faster-growing concepts would become the second.
So far, Darden has rebuffed these calls and CEO Clarence Otis has said that he has no plans to dismantle the restaurant empire he has built.
I think it's too early to abandon ship on Red Lobster and Darden Restaurants. Red Lobster needs to improve the freshness of its menu items and stop with the endless promotions. If that were to happen, I think customers would start returning, at least for the Cheddar Bay Biscuits. This will also be good news for Darden Restaurants as it can start growing sales again. A turnaround at Red Lobster would certainly keep the activists at bay and Otis can say his strategy is working.
For investors, Darden pays a nice 4.1% dividend yield and shares are trading at only 16 times next year's earnings. I do think Darden has a great portfolio of restaurant brands and I think the focus will be on turning around its core concepts and also unlocking shareholder value. Overall, I see improvement for Red Lobster and Darden Restaurants over the next 12-to-18 months.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.