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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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