Joe's Crab Shack Is Eating Red Lobster's Lunch

Joe's Crab Shack Is Eating Red Lobster's Lunch

In many areas in the past, if you wanted to head to a seafood restaurant chain, you were pretty much stuck with Red Lobster. Well, now there's Joe's Crab Shack that's giving Red Lobster a run for its money. Both companies not only compete for your lobster and crab dollars, but your investment dollars as well. While Joe's Crab Shack is part of Ignite Restaurant Group (NASDAQ: IRG), Red Lobster is one of Darden Restaurants' (NYSE: DRI)biggest brands. Let's find out which is the better restaurant.

More than just a crab shack
Joe's Crab Shack continues to be a solid performer for Ignite. Systemwide comparable sales increased 3.3% in the third quarter at Joe's. To capitalize on this trend, the company opened four new locations. In terms of existing locations, Joe's continues to update and remodel its locations as need be.

What I like about Joe's is that its restaurants are known for having quality seafood. Its menu ranges from crabs to shrimp to lobster and to all types of fish. I also like that Joe's concept is more unique than the typical restaurant chain. Part of the allure is the festive atmosphere with cheerful servers. Each location gives the feel that you're back at the beach when you sit down and the first thing you see is a roll of paper towels and a bucket. You get the feeling right away that you can be as messy as you want when you dig into the fresh seafood.

I like Joe's "100% shore" campaign and it's been really resonating with consumers. Joe's advertises itself as offering a shore experience, even for those who live 100 miles or more from the coast. I think this explains a big part of why Joe's has posted positive comparable sales in 20 out of the last 21 quarters. I think this is an impressive feat, especially considering the weakness in the economy. It shows that Joe's offers a menu that consumers want.

A struggling seafood chain
The results have not been as positive for Red Lobster. In the latest quarter, Red Lobster posted a systemwide comparable sales decline of 5.2%. This is not a good sign for the nation's largest seafood chain with 677 locations. Red Lobster was the worst performer in the quarter for Darden, which also owns the Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie Vs, and Yard House.

Even though Red Lobster is struggling, there are still certainly things to like about the chain. First of which is its awesome Cheddar Bay Biscuits. In "5 Things You Didn't Know About Red Lobster", it lays out that Red Lobster serves 395 million Cheddar Bay Biscuits a year. I particularly like the Endless Shrimp deal for $15.99. Red Lobster just got rid of its summer promotions, Seaside Mix & Match and Four Course Seafood Feast, both of which did not perform as well as expected.

While Red Lobster has struggled as of late and Joe's Crab Shack has outperformed, Red Lobster is not dead in the water. I look at the Red Lobster concept as being more upscale than Joe's without the paper towels and bucket on the table. This certainly appeals to a lot of people that feel the same way. What Red Lobster needs to do is simplify their menu and go back to the seafood basics of quality, service and value. Once the chain gets back to basics, sales should start to improve.

Foolish assessment
Shares of Darden Restaurants are 5% higher over the past three months. An activist investor wants Darden to break-up and separate Red Lobster and Olive Garden from its other restaurant concepts. So far, Darden has resisted. While investors wait and see what will happen, Darden pays a nice 4.2% dividend yield, which is one of the highest in the restaurant industry.

While everyone has their favorite seafood restaurant, right now you can't argue with the success of Joe's Crab Shack. With only 136 locations in the U.S. versus 677 locations for Red Lobster, there's plenty of room for growth. For investors, shares of Joe's parent Ignite Restaurant Group are off 24% in the past three months. I see strong sales growth continuing at Joe's Crab Shack and boosting profits for parent Ignite Restaurant Group, which also owns Romano's Macaroni Grill and Brick House Tavern.

Ignite isn't the only one eating their competitors' lunch
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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants. The Motley Fool owns shares of BJ's Restaurants and 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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