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Things Couldn't Get Any Worse at Red Lobster -- Oh, Wait, They Just Did

By John Maxfield – Mar 6, 2014 at 6:00PM

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On Monday, parent company Darden Restaurants announced that same-store sales at Red Lobster plummeted in the most recent quarter.

Red Lobster is a lost cause -- at least, that's what parent company Darden Restaurants (DRI 1.59%) seems to think. In the middle of December, Darden's board of directors announced its decision to remove Red Lobster from its portfolio of full-service restaurants by way of a spinoff or sale.

The question is: Why? What makes Red Lobster the corporate equivalent of kryptonite? Why is Darden's management so hell-bent on the move?

"While we are highly confident the future is bright for both Red Lobster and Darden excluding Red Lobster, we also recognize that the operating priorities, capital requirements, sales and earnings growth prospects, and volatility profiles of the two parts of the business are increasingly divergent," Darden CEO Clarence Otis said at the end of last year.

He went on to note that, "By establishing two independent companies, a separation will better enable the management teams of each company to focus their exclusive attention on their distinct value creation opportunities." It is, in other words, a symbiotic move. 

But lest there be any doubt about a divestiture, Red Lobster's most recent results are likely to put such discontent to rest. On Monday, Darden reported preliminary earnings for its fiscal third quarter. And while the entire company struggled, Red Lobster was far and away the worst among Darden restaurant brands, which also include Olive Garden and LongHorn Steakhouse.

For the three months ended Feb. 23, same-store sales at the seafood chain dropped 8.8%. It was Red Lobster's worst quarterly comp since the financial crisis -- and, consequently, quite possibly the worst of all time.

To add insult to injury, moreover, Darden's darling -- that is, Olive Garden -- reported similarly downbeat results. Over the same three-month stretch, comparable-store sales at the Italian eatery were off by 5.4%. And that's on top of a 4.1% fall in the year-ago period. Compared to 2012, in other words, sales at Olive Garden locations are down by nearly 10% -- sounds pretty bad until you consider that Red Lobster's tanked by more than 15%.

At the end of the day, unless a miraculous turnaround materializes over the next few months, it's hard to criticize Darden's decision to cut its losses with Red Lobster and double down on rejuvenating its bread and butter, Olive Garden. Will this be enough to ignite a renaissance at the Italian eatery and thereby Darden itself? That remains to be seen. But desperate times call for desperate measures.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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