Darden 2Q Net Falls 28% On Soft Sales

Darden Restaurants Inc. said disappointing sales at Olive Garden, as well as increased commodity costs, contributed to a 28-percent year-over-year decline in second-quarter profit.

Management of the Orlando, Fla.-based company, which operates Olive Garden, Red Lobster, LongHorn Steakhouse and several other restaurant brands, said they intended to make bolder moves at the Italian casual-dining chain to stem declines in same-store sales.

For the second quarter ended Nov. 27, Darden earned $53.7 million, or 40 cents a share, compared with $74.5 million, or 53 cents a share, in the same quarter last year.

Sales rose 6.1 percent to $1.83 billion, from $1.73 billion in the same prior-year quarter. Closing costs associated with the purchase of the Eddie V's restaurants reduced profit by 1 cent a share, Darden said.

Darden earlier this month warned that same-store sales at Olive Garden would be negative in the quarter as it saw the chain's customer traffic slip and guests trading down, reducing add-ons and taking advantage of value promotions in great numbers than expected.

Olive Garden's U.S. same-store sales fell 2.5 percent in the quarter. When combined with Red Lobster and LongHorn, same store sales rose 1.8 percent in the quarter.

In the quarter, Olive Garden offered such promotions as the "never-ending pasta bowl" at $8.95 in September and the first week of October, which was followed by stuffed rigatoni with sausage for $9.95 or stuffed rigatoni with chicken for $11.95.

"Neither promotion delivered as many guests as anticipated," Drew Madsen, Darden's president and chief operating officer, said in an conference call Friday with analysts, "and there was more trading to the lower-priced promoted entrées than we have seen historically.

"This trading, combined with lower add-on sales as guests continued to manage their check, resulted in negative menu mix for the quarter," Madsen said.

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Olive Garden also introduced panini sandwiches at lunch.

Clarence Otis, Darden's chairman and chief executive, said efforts at the 763-unit Italian brand fell short.

"The improvements we were making at Olive Garden weren't bold enough," Otis told analysts. "They weren't bold enough in light of the scale and scope of the changes that were taking place at other brands, including Red Lobster and LongHorn. And they weren't bold enough given the changes that were taking place in consumer circumstances and consumer expectations."

Darden is tackling the third quarter with new promotions, work on the core menu and advertising that emphasis family, Madsen said.

The division will also work on its value messaging, he said, especially given the increased emphasis on "affordability" for households with incomes of less than $50,000.

"Olive Garden held on to these guests during the recession better than the industry," Madsen said, "but coming out of the recession these guests experience more persistent economic pressure than we had anticipated based on prior recession. And as competitors made bolder moves to improve affordability, Olive Garden has seen some erosion in this guest segment.

While Olive Garden has mostly maintained its $4.7 million average unit volumes, Madsen said, it needs to narrow its "value-leadership" messaging while working on remodels and adding "some dishes with slightly higher prices" to its core menu.

"In hindsight, we did not evolve our guest experience and communication fast enough during the last couple years to stay fresh and relevant in they eyes of consumers," Madsen said, adding that it turned Olive Garden into a "beloved but somewhat expected brand."

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In other topics covered in the analyst call and in earnings statements:

Commodity costs expected to ease: Brad Richmond, Darden's chief financial officer, said the company anticipates food and beverage cost inflation to be 6 percent in the third quarter and 3 percent in the fourth quarter after experiencing 8 percent food-cost inflation in the first half of the year. Otis added that in the first half of fiscal 2012, seafood costs, which are 31 percent of Darden's total food costs, rose 20 percent over the prior year. "We chose not to jeopardize the progress that Red Lobster has been making by passing that increase along to guests," Otis said.

Menu prices held in check: Madsen said price increases at Red Lobster, Olive Garden and LongHorn were kept in check, in the 2 to 3 percent range, to protect the guest value equation. "The fundamental strategic challenge we face this year is how to address the growing need for affordability that's demanded by our guests while also protecting our margins given significant commodity cost inflation," he said.

Olive Garden sales: Second quarter sales of $836 million were 0.9 percent higher than the prior year, driven by revenue from 28 net new restaurants that offset the 2.5-percent decline in U.S. same-store sales. Olive Garden has 763 units, with six of those in Canada. Madsen said the company will be working on remodeling some of the remaining 430 units that are not in the Tuscan farmhouse model.

Red Lobster sales: Second quarter sales of $602 million were 8.3 percent higher than the prior year, with a 6.8 percent same-store sales increase at domestic restaurants. The division has 674 Red Lobsters in the United States and 27 in Canada. Madsen said sales were helped by a $15.99 endless shrimp promotion. Red Lobster made certain to feature the offer's price point in all commercials throughout the limited time offer, unlike last year's promotion when the prices were not featured in the first four weeks.

LongHorn Steakhouse sales: Second-quarter sales of $255 million were 13.7 percent higher than the prior year, driven by revenue from 27 net new restaurants and a U.S. same-store sales increase of 6 percent. LongHorn introduced a new lunch menu with combination dishes starting at $7.99, and promoted a "steakhouse dinner for $29.99" and stuffed filets during the quarter, Madsen said. The company's "Roadhouse to Ranch house" remodeling program was complete, he said.

Specialty Restaurant Group: Second-quarter sales in Darden's upscale division were $137 million, up 19.1 percent than the prior year. Same-store sales increased 5.7 percent at the 45-unit Capital Grille, 0.5 percent at the 27-unit Bahama Breeze and 2.9 percent at the 21-unit Seasons 52. Eugene Lee, president of Darden's specialty restaurant group, said the purchase of 11 restaurants from Eddie V's Restaurants Inc. was completed on Nov. 14. The specialty group made up 21 percent of Darden's overall sales growth in the quarter, Lee added.

In guidance for the full fiscal 2012, Darden affirmed its estimate that earnings would increase between 4 percent and 7 percent, and sales would rise between 6 percent and 7 percent.

Darden operates a total of 1,936 restaurants.

Contact Ron Ruggless at ronald.ruggless@penton.com.
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