Why Olive Garden and Red Lobster Will Never Be Great Again

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Red LobsterThings appear to be looking up for restaurant operator Darden (DRI).

The company behind Red Lobster and Olive Garden -- as well as the smaller LongHorn Steakhouse, Capital Grille, and Bahama Breeze concepts -- saw its stock hit a new all-time high on Friday after it posted better-than-expected quarterly results.

You won't be terribly impressed.

Sales for the fiscal quarter ending in late August climbed 5%, but that was the result of expansion and the acquisition of 11 Eddie V's restaurants. Combined same-unit sales at Olive Garden, Red Lobster, and LongHorn Steakhouse fell 0.3%. Comps were positive at Olive Garden for the first time in six quarters, but weakness at Red Lobster kept the combined store-level performance negative.

Earnings from continuing operations rose less than 4%, though aggressive buybacks lowered the shares outstanding to the point where diluted earnings per share rose 9% to $0.85 a share.
The market cheered that Darden narrowly beat Wall Street's profit target of $0.84 a share, but it probably wouldn't have been a beat without the stock repurchases.

Unlimited Breadsticks -- and Heartache

JP Morgan (JPM) didn't buy into last week's new all-time high, downgrading the shares on Monday. The stock's valuation was the reason for the new "neutral" rating, as Darden was nearing the analyst's $63 price target.

Bulls will argue that Darden is cheap, fetching just 14 times this fiscal year's projected profitability. The restaurant operator trades at only 13 times estimated earnings for the new fiscal year, which starts next June. We also can't dismiss the deliciously tempting 3.6% yield.

However, what if things don't get better?

There are 705 Red Lobster restaurants and 797 Olive Garden locations. This makes up 75% of Darden's 2,006 eateries, so it's safe to say that the stock's future direction rests on the success of these two chains.

It isn't pretty right now. Traffic at the two chains fell sharply in two of the past three months. Darden has tried to push through higher prices -- things like boosting the price of its "never-ending pasta bowl" promotion 10% to $9.95 this year -- but patrons are holding back.

Darden is responding to the slower traffic at stores by turning to broadening the non-seafood options at Red Lobster and adding small plates and light dishes at Olive Garden. It probably won't be enough.

Fast Casual Is the New Casual

In its recent Restaurant DemandTracker survey, consulting firm Consumer Edge Insight reveals that customers are trading down to fast casual -- the quick-service restaurant niche that includes Chipotle Mexican Grill (CMG) and Panera Bread (PNRA) -- in surprising fashion.

Cash-strapped foodies trading down from fine dining are jumping over Darden's casual dining stronghold to go right to the cheaper eateries.

There's certainly nothing wrong with the quality of a Chipotle burrito or a Panera sandwich. The inconvenience of having to order at a counter is more than offset by the quicker service and the lack of tipping.

Red Lobster and Olive Garden have often been casual dining punch lines. Olive Garden's old "when you're here, you're family" tagline only attracted more derision.

Darden's other chains have held up better. Capital Grille is an elite chophouse. Its recently acquired Yard House is a foodie-friendly pub. Seasons 52 draws in fashionable calorie counters. However, these promising concepts are just too small to move the needle at Darden.

Larger trends are working against Red Lobster and Olive Garden, and the stock barreling toward a new high late last week is at odds with the challenges of winning back patrons.

Check, please.



Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Darden Restaurants, Panera Bread, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill and Panera Bread.


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Carolyn

Love, Love, Love Olive Garden's Artichoke Dip, but they're on their way out when they charge - $9.95 for a dip. Get real ~

We go to an Olive Garden at least 3 times a month and have begun to notice that customers do not seem to be coming in the door like they use to. However, at other times, there is a waiting list for seating.

There's a game that a lot of Olive Garden restaurants play. The price changes daily at 4:00 p.m. from lunch costs to dinner costs; but, they (greeter staff) will not seat you until after - 4:00 p.m. due to the fact that many waiters & waitresses come on duty 'after' - 4:00 p.m. We have, personally, seen this at several Olive Garden restaurants, especially since we eat there sooooooo often. The cash register changes their prices at - 4:00 p.m. while the greeter staff has the customers sit and wait until a few of the wait staff reports for duty.

We suspect that it's the company motto - "When you're here, you're family", that keeps everyone coming in. It's quite rare to see professional people eating here for lunch or dinner. Almost everyone is in sports clothes and with other family members or their close friends.

However, they (Olive Garden) have to keep their eye on their costs as they are rising too quickly right now, and most everyone is looking to save their monies. We're all watching what's happening to the national economy right now and trying not to spend too much dining out. Lots & lots & lots of restaurants, including chain restaurants, are going - BOGO these days, but not Olive Garden or Red Lobster. Both restaurants need to hold down their prices as word does pass around.

September 27 2012 at 4:32 PM Report abuse rate up rate down Reply
Carolyn

Love, Love, Love Olive Garden's Artichoke Dip, but they're on their way out when they charge - $9.95 for a dip. Get real ~

We go to an Olive Garden at least 3 times a month and have begun to notice that customers do not seem to be coming in the door like they use to. However, at other times, there is a waiting list for seating.

There's a game that a lot of Olive Garden restaurants play. The price changes daily at 4:00 p.m. from lunch costs to dinner costs; but, they (greeter staff) will not seat you until after - 4:00 p.m. due to the fact that many waiters & waitresses come on duty 'after' - 4:00 p.m. We have, personally, seen this at several Olive Garden restaurants, especially since we eat there sooooooo often. The cash register changes their prices at - 4:00 p.m. while the greeter staff has the customers sit and wait until a few of the wait staff reports for duty.

We suspect that it's the company motto - "When you're here, you're family", that keeps everyone coming in. It's quite rare to see professional people eating here for lunch or dinner. Almost everyone is in sports clothes and with other family members or their close friends.

However, they (Olive Garden) have to keep their eye on their costs as they are rising too quickly right now, and most everyone is looking to save their monies. We're all watching what's happening to the national economy right now and trying not to spend too much dining out. Lots & lots & lots of restaurants, including chain restaurants, are going - BOGO these days, but not Olive Garden or Red Lobster. Both restaurants need to hold down their prices as word does pass around.

September 27 2012 at 4:32 PM Report abuse rate up rate down Reply
Shut The Hell Up

I do like both. but to me the food is over price also. Olive Garden no longer make there own food like they sya they do. It all frozen crap. And oh my god there lagansa is horriable

September 27 2012 at 2:46 PM Report abuse -1 rate up rate down Reply
Cindy

I love Olive Garden. Whenever I am traveling, it is a safe place to go to eat. I also rely on IHOP.
I have been sick eating food at unknown local restaurants. And if you think being sick at home is hard enough, try being sick out of state.

September 27 2012 at 1:32 PM Report abuse -1 rate up rate down Reply
fernerobin

WHEN will 'business' learn about the vast 'US'...the totally price-driven surgical shopper/diner? We will rarely go to an Olive Garden type restaurant when we can get good tasty food elsewhere, cheaper and with NO TIPPING! We more & more HATE tipping for rude arrogant non-service from children who resent being in a service industry but still expect to be tipped! I'll take a good Asian buffet anytime,,,decent (if not great) food every time and no tipping required. (The poor girls working there don't get to keep any tips anyway.)

September 27 2012 at 1:15 PM Report abuse -3 rate up rate down Reply
fernerobin

WHEN will 'business' learn about the vast 'US'...the totally price-driven surgical shopper/diner? We will rarely go to an Olive Garden type restaurant when we can get good tasty food elsewhere, cheaper and with NO TIPPING! We more & more HATE tipping for rude arrogant non-service from children who resent being in a service industry but still expect to be tipped! I'll take a good Asian buffet anytime,,,decent (if not great) food every time and no tipping required. (The poor girls working there don't get to keep any tips anyway.)

September 27 2012 at 1:13 PM Report abuse -2 rate up rate down Reply
fernerobin

WHEN will 'business' learn about the vast 'US'...the totally price-driven surgical shopper/diner? We will rarely go to an Olive Garden type restaurant when we can get good tasty food elsewhere, cheaper and with NO TIPPING! We more & more HATE tipping for rude arrogant non-service from children who resent being in a service industry but still expect to be tipped! I'll take a good Asian buffet anytime,,,decent (if not great) food every time and no tipping required. (The poor girls working there don't get to keep any tips anyway.)

September 27 2012 at 1:13 PM Report abuse -1 rate up rate down Reply
jroycrs

Here in SC, Greenville, the Olive Garden and Red Lobster restaurants are ALWAYS full. Actually, it is always long long lines and waits at both restaurants. As for Red Lobster, it seems to be everybody's favorite eating place. One can NEVER just walk in and get a table. They are doing fabulously here in Greenville!

September 27 2012 at 1:04 PM Report abuse +2 rate up rate down Reply
jroycrs

Here in SC, Greenville, the Olive Garden and Red Lobster restaurants are ALWAYS full. Actually, it is always long long lines and waits at both restaurants. As for Red Lobster, it seems to be everybody's favorite eating place. One can NEVER just walk in and get a table. They are doing fabulously here in Greenville!

September 27 2012 at 1:04 PM Report abuse rate up rate down Reply
richmarset

Ate at Red Lobster last night, my Lobster was overcooked. They charged $33.50 for a strip steak (cooked perfectly) and a Rock Lobster tail. We ate there last month and my Lobster was again overcooked and I told my server, who seemed to care less. That Lobster was $30.50 with out the steak. I judge young chef's competitions so I know when the cooking is not right. On a one to 10 scale I would give them a 3 on the lobsters. By the way the salads are now minisciule, they are served in the bottom of a bowl. It's prime tomato season around here and mine were not yet ripened and were see thru thin. No wonder business is bad.

September 27 2012 at 12:05 PM Report abuse rate up rate down Reply