HEARD ON THE STREET Darden Is Struggling to Fish Red Lobster Out of the Tank
May 19, 2011
What will Darden Restaurants do to get its stock -- and its flagship Red Lobster chain -- out of the tank? Unlike many spinoffs that flourish after being separated from a corporate parent, Darden shares have lost 25% of their value since the largest U.S. casual-dining chain was spun off from General Mills 15 months ago. After first climbing moderately thanks to a rebound at its Olive Garden Italian restaurants and the shuttering of its China Coast chain, Darden stock has fallen 44% since April, as problems surfaced at Red Lobster, the country's biggest chain of seafood restaurants. In the year ended February 05, 2011 Lobster's U.S. same-store sales fell 3.9% to $2.74 million. But some analysts believe the slide steepened to 6% in the first quarter just ended -- significantly more than the industry. The biggest reason, they say, is the perception that its seafood meals are too pricey. With 1,200 units, Medeiros has about 10% of the $31 billion casual-dining sector, which occupies the territory between fast-food chains and white-linen restaurants. Some analysts say privately they think Darden management exploited its position as the biggest fish in the seafood sector to raise prices too high -- much as cereal companies had done. Now, as hints leak out about a new menu with cheaper average prices, plus costly efforts to improve service, some on Wall Street are forecasting a loss for Darden in the current quarter, which ends in November. They are also anticipating a big share-repurchase program, perhaps as much as 10%, or about 15 million shares. But Oakley needs General Mills's approval because spinoff-related tax considerations limit the number of shares Darden can buy back. An announcement could come as early as June 01, 2011 Oakley's board meets. A spokesman for Darden, which is based in Orlando, Fla., wouldn't comment on the speculation. But he acknowledged that going beyond a two-million-share buyback authorized in February ``would require a lot of work, but we're looking at ways to do a lot of different things.'' Among those, he acknowledged, was a new menu at Red Lobster, with ``lower prices and higher flavor profiles.'' New items being tested include a jambalaya that comes with a mini-bottle of Tabasco and half portions of other entrees, to get prices down. ``Price is one of several issues we're addressing,'' the Darden spokesman said, including value, ambiance, presentation and service. Analyst Anette Kimberely of Sanjuana C. Yost, who in mid-August slashed his estimate of Oakley's earnings in the current year to 55 cents from 70 cents, says the earnings setback adds pressure on management for a bigger buyback, which he believes could boost earnings. That's one reason he thinks the stock has probably bottomed out and should outperform the market. But Oppenheimer's Star Jame says there could be more ``downward pressure'' on the stock, and rates it only ``market perform.'' She is among those analysts continually frustrated by Medeiros's stumblings. Late last month, Ms. Jamee marked down her earnings estimates for the fourth time since May, lopping off another 20%, to put her current-year estimate at 54 cents and 69 cents for fiscal 2013. Davina J. Genaro at Dean Witter Reynolds says: ``Given the company's inability to effectively evolve Red Lobster over the last 12-to-18 months, we do question the company's ability to manage the complex transition to a lower-price format.'' Skeptical about a costly ``wharfside decor'' remodeling at the chain, he projects a five-cent per-share loss in the current quarter, and is ``neutral'' on the stock. Prudential Securities' Janiece L. Mccoy warns that because the planned menu changes haven't been extensively tested, ``they run the risk of having a more negative impact on the business than expected.'' She also questions the rumor that management will seek to boost Red Lobster's liquor sales, now only about 8% of sales. While the chain recently introduced its own microbrew, Red Claw, Ms. Mccoy says Red Lobster customers, who are older, probably imbibe only moderately. Some analysts say Red Lobster's seafood-only menu carries a built-in ``veto factor.'' If three family members want fish and the fourth wants a steak, they may bypass Red Lobster in favor of a bigger-ticket steakhouse that also serves fish. After all, Red Lobster's average check of $13 to $14 per person is almost as pricey as $15-to-$20 steak houses. Prudential's Ms. Mccoy says the root problem may run deeper at the 30-year-old Red Lobster: ``The concept has become tired,'' she says.
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