Olive Garden and Red Lobster Have a Lot to Prove


Darden Restaurants makes a lot of breadsticks at Olive Garden, Cheddar Bay biscuits at Red Lobster, and hearth-baked bread loafs at LongHorn Steakhouse.

It just can't seem to make a lot of dough.

The casual dining bellwether reports quarterly results on Friday, and it's not likely to be pretty. Customers have been staying away from its flagship eateries, as same-restaurant sales declined 4.6% for the three concepts combined during the holiday quarter.

Expansion, acquisitions, and heady growth of smaller concepts is keeping the top line growing, but profitability is expected to take another hit this week.

Analysts see earnings clocking in at $1.04 a share, well short of the $1.15 a share it posted a year earlier. If so, this would be the third consecutive quarter that year-over-year profitability declines at Darden. This is something that didn't even happen during the darkest recessionary stretches a few years ago.

Don't dwell on the nearly 10% revenue growth that Wall Street is targeting. This is largely the handiwork of the $585 million acquisition of Yard House that Darden completed last summer. Comps have also been positive at Darden's higher-end The Capital Grille and Eddie V's, but neither chain is moving the needle here. Darden will continue to live and die by the success at Olive Garden, Red Lobster, and, to a lesser extent, LongHorn, and for now it's not generating much of a pulse.

Consumers have grown choosy about their meal outings. They're willing to trade up for premium experiences, and we're seeing that in growth at Darden's The Capital Grille, Seasons 52, and Eddie V's. However, more often than not, we're also seeing the hungry trade down to fast casual.

Chipotle Mexican Grill and Panera Bread are the rock stars of dining out these days.

The poster children for fast casual are growing at double-digit rates without having to buy smaller chains the way that Darden did last August.

Wall Street sees Chipotle and Panera growing revenue by 16% and 14%, respectively, this year. Double-digit percentage growth seems likely for several more years.

Why are they doing so well? A couple of factors are helping. True to its name, fast casual is fast. Chipotle orders are whipped up as they are being ordered. Panera orders are usually ready in a couple of minutes. Pre-paying for the orders also saves time. There's no need to flag someone down for a check at the end of the meal. The food is also generally cheaper, and that's before you bake in tip money.

Casual dining has tried to respond. Applebee's is testing out lunchtime kiosks where patrons can pre-pay for their meals at an order counter. Chili's offers a meal plan where two can dine for $20. However, until we see comps turn positive for casual dining, it's hard to get excited about Darden's chances.

Industry tracker NPD Group estimates that fast-casual sales rose 8% last year, compared to a slight decline at traditional table service restaurants.

We'll get a clearer snapshot on Friday, but don't be surprised if Darden is once again a few breadsticks, cheddar biscuits, and honey wheat loaves short.

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The article Olive Garden and Red Lobster Have a Lot to Prove originally appeared on Fool.com.

Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill and Panera Bread. It also owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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