In the end, Darden Restaurants, Inc. (DRI) couldn’t save both Olive Garden and Red Lobster, two of its largest chains. But will a planned sale of Red Lobster boost long term prospects for this Zacks Rank #5 (Strong Sell)?
Darden operates about 2100 restaurants worldwide, including some of the most recognized restaurant brands of Olive Garden, Red Lobster, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House.
Spinning-Off Red Lobster
On Dec 19, Darden announced a plan to spin-off or sell Red Lobster by mid-2014. Red Lobster operates 705 restaurants in the United States and Canada.
In recent years, Red Lobster has been the brand that has lagged, predominantly due to seafood costs and the market demographic, which trends towards the more upscale diner.
Darden appointed Kim Lopdrup, who had served as Red Lobster’s President from 2004 to 2011, as the new CEO of the Red Lobster group.
Darden also said it was suspending any new additions to Olive Garden and limiting the expansion of LongHorn Steakhouse while the Red Lobster spin-off was occurring.
Will Getting Rid of Red Lobster Be the Solution?
Darden also announced fiscal second quarter results on Dec 19 and it missed on the Zacks Consensus Estimate for the third straight quarter.
Out of all of its brands, same-restaurant sales lagged the most at Red Lobster. They fell 4.5% in the quarter as restaurant traffic also lagged. But Olive Garden, Darden’s largest brand, wasn’t exactly hitting it out of the park either. Same-restaurant sales at Olive Garden fell 0.6%.
LongHorn Steakhouse boosted the quarter, however, with same-restaurant sales growth of 5%. The company’s specialty restaurants also performed well with same-restaurant sales gains of 6.7% at The Capital Grille, 6.2% at Bahama Breeze, 5.7% at Eddie V’s, 1.2% at Seasons 52 and 1.2% at Yard House.
Olive Garden has been going through a brand revamp for several years now. Analysts believe that by spinning off Red Lobster, Darden can then focus on fixing whatever is ailing Olive Garden.
Earnings to Decline in Fiscal 2014
Given the spin-off, it’s not surprising that analysts lowered their earnings estimates for fiscal 2014. 18 estimates have been lowered for fiscal 2014 in the last month.
The Zacks Consensus Estimate has fallen to $2.57 from $2.88 for fiscal 2014. That is an earnings decline of 18.3% from the $3.14 Darden made in fiscal 2013.
The Zacks Rank is a short-term recommendation of 1 to 3 months. Darden is clearly undergoing a turnaround with the spin-off of Red Lobster.
For those investors who don’t want to wait for things to turn around, you might want to consider Fiesta Restaurant Group, Inc. (FRGI). The operator of Pollo Tropical in Florida and Taco Cabana in Texas is a Zacks Rank #1 (Strong Buy). Earnings are expected to grow 48% in 2014.
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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Value Investor service. You can follow her on twitter at @TraceyRyniec.
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