High Shrimp Prices Could Make Darden Restaurants Seasick

by Alyssa Oursler | August 19, 2013 10:29 am

High Shrimp Prices Could Make Darden Restaurants Seasick

For Darden Restaurants (DRI[1]) — the Red Lobster parent company whose margins are already being squeezed — record-high shrimp prices are the last thing the company needs.

But that’s exactly what it’s getting.

Shrimp prices[2] are currently around $6 a pound — a hefty 56% higher than this time last year. The main culprit: a disease that has severely dwindled the supply of shrimp supplied by China, Thailand and Vietnam.

That’s worrisome considering that at Darden Restaurants — which also operates Olive Garden and LongHorn, as well as a few smaller chains — seafood accounts for roughly a quarter of total cost of goods sold, and shrimp is Red Lobster’s most popular option (offsetting the silver lining of cheaper lobster prices[3]). That’s also bad news considering Darden has been lowering prices in an attempt to lure in more cost-conscious customers.

In the most recent quarter, for example, Darden earnings declined 12% year-over-year despite a double-digit improvement in sales. Mix higher input prices in with those already-lower output prices, and you have a recipe for disaster.

No wonder analyst estimates for the current quarter have fallen by 10% in the most recent months, slipping from earnings of 82 cents per share to EPS of 74 cents. In other words, Wall Street originally forecast DRI profits to slide 4% year-over-year, but that gap has widened to 13%.

Of course, Darden Restaurants isn’t along in its shrimp-centric woes. Ignite Restaurant Group (IRG[4]) — which operates Joe’s Crab Shack, a handful of Brick House Tavern + Tap locations and, as of April, Romano’s Macaroni Grill — also has been struggling to improve earnings lately.

The company almost doubled its sales last quarter thanks to the Macaroni Grill acquisition, but still posted a steep EPS decline and missed expectations. One reason: “Necessary spending increases” from the Macaroni Grill buy.

Even after the acquisition, Joe’s Crab Shack still makes up the bulk of the sales, meaning necessary spending increases from higher shrimp prices is just another problem on the pile.

Back in May, IRG’s current-quarter earnings were estimated to come in at 40 cents per share back in May, but that outlook has dwindled to 28 cents per share. Meanwhile, full-year expectations have are less than a third of what they were 90 days ago.

The bottom line: With shrimp in a crimp[5], these companies could be in one, too.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. DRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRI
  2. Shrimp prices: http://investorplace.com/2013/08/shrimp-prices-hit-record-high/
  3. cheaper lobster prices: http://money.msn.com/now/post--lobster-lovers-rejoice-prices-are-falling
  4. IRG: http://studio-5.financialcontent.com/investplace/quote?Symbol=IRG
  5. shrimp in a crimp: https://www.rabobank.com/en/press/search/2013/20130814_Rabobank_Report_Shrimp_in_a_crimp.html

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