Please ensure Javascript is enabled for purposes of website accessibility

Darden Restaurants, Inc. Earnings: Will Olive Garden and Red Lobster Bounce Back?

By Dan Caplinger – Mar 20, 2014 at 11:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The popular restaurant chain reports earnings Friday, but investors expect a big drop in earnings from year-ago levels. Find out why here.

Darden Restaurants (DRI 0.83%) will release its quarterly report on Friday, and investors haven't been pleased about the trends that have held share prices down over the past few months. Unlike Cracker Barrel Old Country Store (CBRL 1.06%) and Brinker International (EAT 2.10%), Darden isn't expected to show earnings growth for the rest of its 2014 fiscal year, with a bounce-back coming in 2015 at the earliest. Can the company behind the Red Lobster and Olive Garden chains surprise shareholders with stronger earnings growth?

Darden isn't a name that most restaurant patrons know, but between top chains Olive Garden and Red Lobster as well as other concepts like its LongHorn Steakhouse and Bahama Breeze restaurants, the company has a wide range of dining options for its customers. Yet the Florida-based company has had to deal with tough economic conditions that have pressured would-be diners to economize by eating out less. That has forced Darden to look at innovative ways to spur growth. 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: Wikimedia Commons.

Stats on Darden Restaurants

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$2.25 billion

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance.

Can Darden earnings start rising again?
Analysts have been decidedly negative about Darden earnings in recent months, cutting February-quarter estimates by 17% and making roughly $0.20-per-share reductions in their calls for the 2014 and 2015 fiscal years. The stock has responded accordingly, falling 3% since mid-December.

We've already gotten a sense of how Darden's earnings will pan out this quarter, as the company issued preliminary guidance earlier this month. A tough winter hit same-store sales figures hard, with declines in the 1% to 2% range for each of the three months in the quarter, with Red Lobster comps expected to fall 8.8% and Olive Garden comps down 5.4%. Yet weather likely wasn't the only thing hurting Darden, as its November-quarter results also showed substantial drops in comps for its top chains. In that quarter, Red Lobster again took the brunt of the hit as same-store sales fell 4.5%, but Olive Garden also declined 0.6% for the quarter. That was bad news compared to Brinker, which managed to post positive comps in its most recent quarter.

An even bigger distraction for Darden has come from activist investors, as multiple hedge funds are jockeying for position with competing ideas on how to help the company recover. In December, Darden decided to spin off Red Lobster after calls from hedge fund Barington Capital Group to separate the company's various chains. Yet that hasn't been enough to satisfy either Barington or fellow hedge fund Starboard Capital, as Barington wants a more extensive restructuring that would combine Red Lobster and Olive Garden under one entity, put the rest of Darden's chains into a second, and create a third entity to act as a real estate investment trust holding the company's real estate assets. Starboard has a slightly different proposal, adding LongHorn to the Olive Garden/Red Lobster entity. Both Barington and Starboard want to delay a Red Lobster spinoff in order to consider different proposals. Cracker Barrel has faced similar activist issues, but it has done a better job of confronting Biglari Holdings' Sardar Biglari and his efforts to restructure Cracker Barrel.

Still, Darden is trying to improve on an operational front. Earlier this month, it said it would change the Olive Garden logo and make more menu changes. By updating the menu to create small-dish options that could be mixed and matched more easily, Darden hopes to encourage more sales from what has been a sharply dropping customer base lately. Yet the logo change has gotten criticism from those who say it comes at the worst possible time, as customer traffic falls and brand awareness is essential.

In the Darden earnings report, watch to see how the company deals with activist pressure while still seeking to move forward with its fundamental operations. Until things shake out, Darden will have a tough time giving investors the confidence they need to feel good about owning shares.

Click here to add Darden Restaurants to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Dan Caplinger has no position in any stocks mentioned, and neither does The Motley Fool. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.