Darden Restaurants (DRI) has been sailing through troubled waters for quite some time. Its dismal performance continued when the company reported its second-quarter results. Let us take a deeper look at its performance and its prospects compared to peers.
Reviewing the Performance
Darden operates restaurant chains such as Red Lobster, Olive Garden and LongHorn Steakhouse. This dismal performance built up pressure upon Darden from its investor Barrington Capital Group to spin off the Red Lobster chain, which had seen comps decline 4.5% in the previous quarter.
Its consolidated revenue increased 4.6% to $2.05 billion year over year, led by the opening of new units along with a 4.1% comps growth in the Specialty Restaurant Group. But Darden failed to meet the consensus estimates on revenue.
In addition to this, an uncertain economic environment is adding to the problems of Darden. A new report has shown that retail sales of fish and seafood products increased from $13.3 billion in 2008 to $14.7 billion in 2012. However, the consumption of fish and shell fish declined from 16 pounds in 2009 to around15 pounds in 2011. This was mainly on account of shrinking wallets of consumers due to a hostile job market.
From this, we could understand why Red Lobster was the worst performer. The company had made tremendous efforts to boost the number of Red Lobsters, but all was in vain, with a 5.2% decline in sales. Moreover, Darden anticipates that comps will further decline 4% to 5% for Red Lobster in the current fiscal.
Because of the continuously declining sales and profits, Barrington Capital, which owns 2% of Darden shares, proposed to spin off Red Lobster. Although the proposition was to spin off both Red Lobster and Olive Garden, but Darden yielded for only one.
But the story does not end here, as Darden has yielded to Barrington’s various other requests as well. Consequently, it will suspend investments in new Olive Garden units beyond the ones which are already in progress. Along with that, it will slow down growth at LongHorn and the Specialty Restaurant Group.
In addition to all the internal problems, Darden has to face tough competition from Bloomin’ Brands (BLMN). In a recent report, it was seen that Bloomin’ has outpaced the KNAPP Casual Dining index for sales and traffic by around 210 and 400 basis points, respectively. In spite of a weak dining industry, Bloomin’ is confident to keep up its growth trajectory. It has entered markets which are currently occupied by Red Lobster, including Connecticut, Massachusetts and Rhode Island.
In the third quarter, Bloomin’ had opened various outlets at 14 new locations, which include six Bonefish Grills; three Carrabba's; one domestic outback; two international Outbacks, one each in South Korea and Mexico; one new Brazilian location; and one international franchise restaurant. Looking forward the company anticipates to open another 45 to 55 new outlets.
Bloomin has expanded its foothold in the Brazilian market by acquiring 40% more stake in its Brazilian joint venture, which brings the overall stake to 90%. It considers Brazil as an important market with immense growth potential. This new firm has been in operation for more than 15 years, with more than 5,000 employees, and Bloomin’ believes the numbers can double in the next five years to around 100 restaurants.
In the end, Darden doesn’t look to be a good investment option for now as the company is underperforming and is being forced to sell its restaurant chains. Comparatively, Bloomin’ Brands has delivered a good performance, keeping the pace of its growth momentum intact and making it a better proposition in this space.