Dismal Declines on Multiple Fronts for Red Lobster, Olive Garden

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Exterior Views of Red Lobster And Olive Garden Ahead of Darden Restaurants Earns
Victor J. Blue/Bloomberg/Getty Images
Things aren't going so well for casual dining giant Darden Restaurants (DRI). The company behind Red Lobster, Olive Garden, LongHorn Steakhouse and several other smaller concepts posted uninspiring financial results on Friday.

Sales slipped 1 percent in its fiscal fourth quarter, but it would have been far worse if Darden hadn't opened 83 net new restaurants over the past year. Earnings before taxes plunged 30 percent during the period.

Olive Garden and Red Lobster continue to be the two biggest laggards at Darden, and that's a big problem since they account for 69 percent of the parent company's sales.

Plenty of Available Tables at Red Lobster

Red Lobster saw its business take another hit after U.S. same-restaurant sales declined 8.8 percent for the quarter. If you want an even scarier picture of how empty Red Lobster eateries have been lately, consider that the 8.8 percent drop includes the impact of slight menu price increases and folks ordering more beyond that. In terms of seated patrons, traffic at Red Lobster for the months of December, January and February fell by an average of 12.3 percent, 18.7 percent and 11.9 percent, respectively.

The silver lining in this barren lobster trap is that Darden already started to move on. Last year it vowed to sell the chain or spin it off to shareholders as a standalone entity. They could then either dump the stock to remain invested in the balance of the operator's concepts or hang on to Red Lobster in hopes of a turnaround. It hasn't been able to smoke out a buyer, and that's not a surprise given Red Lobster's deteriorating performance with sharp declines in comps for all three fiscal quarters so far of fiscal 2014.

Spinning it off seems to be the only way out. However, that will put a lot of pressure on Olive Garden at a time when the Italian dining chain isn't doing so hot.

Hunkering Down at Olive Garden

Olive Garden accounted for $929 million of the $2.23 billion in sales generated by Darden for the quarter, so it's already a major driver. It will become an even bigger component once Red Lobster -- ringing up $611 million in sales during the lackluster holiday quarter -- is thrown back into the water.

The oft-lampooned Italian chain -- best known for its bottomless salad bowls and unlimited breadsticks -- also is having its struggles this fiscal year. U.S. same-restaurant sales fell 5.4 percent, and just like Red Lobster the actual traffic inside the average eatery is uglier than that.

Olive Garden recently spruced up its menu by offering premium salad toppings and more customized pasta entrees. The move certainly makes more sense than the Italian hamburger it added late last year. However, the moves may not be enough to get folks back into Olive Garden at a time when Darden shareholders will be relying on the chain more than ever.

It doesn't help Olive Garden that folks are easing back on carbs, which likely led to the Chapter 11 bankruptcy reorganization filings of Sbarro and Quizno's just days apart earlier this month. Darden knows this. It's scaling back expansion for Olive Garden until it can get things right.

With Red Lobster eventually out of the picture and Olive Garden in a holding pattern, Darden can emphasize the prospects of its smaller concepts that are faring better than the two chains that investors typically associate with the company. But everything from its ability to continue shelling out it beefy quarterly dividend to returning to earnings growth will be dictated by how well Olive Garden navigates this very challenging environment.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days. ​

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immortalosiris

Not to say I'm in love with OG but I do work there and idk who told you everything was pre packaged and microwaved but it's not. We have prep people that come it at 8 ever morning to start making soups and sauces and cutting up vegetables. The only thing that was prepackaged and microwaved was the old gluten free marinara pasta and that stuff was nasty. But it is becoming more and more "Italian fast food"

May 26 2014 at 3:08 PM Report abuse rate up rate down Reply
campbell258

Please forgive my poor spelling here but hope fully this might help . Red lobster...here in vegas we call it pink shrimp-there is hardly any lobster items at all on the menu.When ever there is its so overpriced we can go to a much classier high end restaurant and eat for the same price. No money at all has been put into revamping the old buildings at all. As far as Olive garden goes.you have at least an hour plus 90 % of the time to eat at one here. why bother?? I can go across the street and eat outback steakhouse,joes crab shack with minimal wait ,if any,for the same price. Then when you are walking away you look thru the window at numerous empty tables and booths. We call it 'italian fast food' here due to the lack of service and quality. Anyways,thats just here, Dont know if its the same elsewhere.

March 29 2014 at 12:06 AM Report abuse rate up rate down Reply
jamnjer29

as long as they continue to raise prices....they will loose more and more business.

March 24 2014 at 12:42 PM Report abuse rate up rate down Reply
Imma Fubared

When I heard O Garden makes there food in factories, flash freezes each meal in bags and ships it out so the so called chef in the kitchen can put the bag in a microwave and pour the thawed sauce on the pasta and thats Italian?
My issue, I have no way of knowing who, how and when that food was handled in case I get sick.
One reason we have these epidemics is a lot of these chain places are doing this and you can never go back and find out who contaminated the food.

March 21 2014 at 11:56 PM Report abuse +1 rate up rate down Reply
k4jlp

Sorry Corporate America, we have given our little bit of extra income to the energy, healthcare and insurance industry, check with them, their flush with cash.....

March 21 2014 at 5:12 PM Report abuse +2 rate up rate down Reply