The management company behind chain restaurant staples such as Olive Garden and Red Lobster, Darden Restaurants (DRI 1.15%) reported earnings on Thursday that weren't quite up to what analysts and investors had hoped for. While the top and bottom lines were nothing to salivate over, the company did offer some compelling information that addresses a long-running concern of shareholders and analysts alike: By spinning off Red Lobster into its own trap, Darden gets a double victory -- the company can profit from the spinoff and return focus to its remaining brands. The market may not like the stock today, but investors may want to listen up.
Earnings soured
Top-line sales actually increased for the company's fiscal second quarter, up 4.6% to more than $2 billion. The gains were led by a combination of recently opened restaurants and the ongoing success of Darden's Specialty Restaurant Group.
Same-store sales varied across the board. As mentioned, the company's SRG did well, up 5% year over year. This includes properties like LongHorn Steakhouse, The Capital Grille, and Yard House. Olive Garden saw its sales shrink slightly, down 0.6%. Red Lobster took the cake for worst performer, as its comparable sales dropped 4.5%.
The bottom line was worse than the already-low expectations from analysts and investors. Darden earned $0.15 per diluted share -- more than 42% under 2012's second-quarter earnings of $0.23 per share. Management did note, however, that a hit of approximately $0.05 per share came from exploring strategic options and related benefits costs.
Fiscal 2014 earnings are projected to be 15% to 20% lower than 2013's, further disappointing investors. Most of the hit stems from a material adjustment downward for Red Lobster sales.
Looking back on the past year and ahead to the coming one, things aren't too appealing for Darden and its investors. The long term, though, should get better.
Magic trick
Soon-to-be-spun-off Red Lobster isn't an inherently bad business -- just look at higher-market competitor Bonefish Grill. The issue is a matter of management spread too thin among the various strategies and markets. Darden is finding great success with LongHorn, Yard House, and others. At the same time, Olive Garden and Red Lobster are floundering.
Spinning off Red Lobster gives the company an easy exit out of a tough position. Investors may also get a present with the new company's shares. The affordable seafood slinger needs a focused team to reinvent the brand, and yes, it can be done. At the same time, the parent company can do its own realignment and leverage the earnings power of its growing properties.
For current investors, this is no time to bail out. The stock has had a rough year, and it likely won't improve anytime soon. But don't lose hope; management is taking the right motions to turn things around.
