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Weak economy pinches Red Lobster

February 22, 2013: 12:21 PM ET
Red Lobster owner Darden Restaurants is predicting bleak sales. But investors didn't get too steamed about it.

Red Lobster owner Darden Restaurants is predicting bleak sales. But investors didn't get too steamed about it.

You can add Darden Restaurants, the owner of the Red Lobster and Olive Garden chains, to the growing list of consumer companies blaming a weak economy for a poor sales outlook.

Darden (DRI) said that it expected pretty steep drops in same-store sales at most of its chains for the fiscal third-quarter. That quarter ends next week. Darden will officially report its results in March.

Darden's CEO specifically cited the payroll tax hike and higher gas prices as a problem. There are concerns that low-income and middle-class consumers will be squeezed by higher taxes and rising energy costs. Wal-Mart (WMT) warned Thursday of soft February sales too.

But Wall Street didn't seem to care. Shares of Wal-Mart rose Thursday. And shares of Darden were up 2% Friday. What gives? Traders on StockTwits had some thoughts.

HowardWPenney
this explains it the $DRI move Darden Restaurants upgraded to buy at Janney Capital

stephanie_link
Janney u/g $DRI to buy. Certainly cheap so many others to buy on weakness.

I guess that makes sense. Darden shares have lagged other casual dining stocks. The worst may now be priced in, especially since Darden's valuation of 12 times fiscal 2014 earnings estimates is cheaper than rivals like Chili's owner Brinker International (EAT) and Applebee's parent DineEquity (DIN).

But not everyone was convinced. Some traders took the novel approach of treating bad news like bad news. Imagine that.

Mr_Abundance
@HedgeyeHWP: $DRI Darden Restaurants guides Q3 EPS $1.00-$1.02 vs FactSet $1.12 .... Oh my..." Further signs of consumer fatigue! $SPY

JohnAGordon
$DRI: we should not be surprised by this, but LH and upper end brand softness is notable. Comps cliff until Q3. http://t.co/s4X4PnGVlC

Indeed. The LH that John is referring to is LongHorn Steakhouse. And the expected slide at that chain is relatively mild compared to other Darden brands. The company said it was forecasting a 1.5% decrease in same-store sales there compared to a 4% drop at Olive Garden and 7% decline at Red Lobster.

People may be less likely to go out to eat -- even at places that are relatively affordable -- until it's more clear where the economy is going. Fiscal cliff fears have been replaced by worries about forced budget cuts. You can't blame consumers for being nervous.

One trader used a pop culture reference to cite the particularly bad numbers at Darden's home for seafood lovers.

LifeSciencesMkt
"You wanna go Red Lobster?" said Shooter McGavin and apparently no one else as $DRI guides down in pre-announcement

Ha! Nice "Happy Gilmore" reference. Shooter is definitely one of the better comedic villains. Seems like investors are acting like Rob Schneider's character though. Come on Darden. You can do it!

And now it's time for the Reader Comment of the Week.

There were several Twitter hack attacks this week. The one on Burger King (BKW) was the most notable. I joked that while I definitely would not appreciate being hacked, it would be a badge of honor. I figured the worst thing that someone could do would be to change my bio to say I was a New York Rangers fan. One follower took it a step further.

Well-played. I report. You know the rest. Anyway, I am out all next week. Keep following The Buzz blog for breaking market news. But my contributions to the blog -- and seemingly infinite tweeting -- will resume on March 4.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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