Olive Garden Dampens Darden 2Q Forecast

Darden Restaurants Inc. said Tuesday its earnings for the second quarter would be lower than previously forecast, partly due to persistent sales trouble at its Italian casual-dining Olive Garden brand.

Orlando, Fla.-based Darden estimated that same-store sales for the second quarter ended Nov. 27 would be down 2.5 percent at 750-unit Olive Garden, while it expected increases of 6.8 percent at Red Lobster and 6 percent at LongHorn Steakhouse.

Darden said Olive Garden's sales decline had accelerated during the quarter, slipping 0.8 percent in September, 1.5 percent in October and 5.7 percent in November.

That led Darden to estimate earnings per share of about 41 cents per share in the quarter, considerably lower than analyst expectations of 54 cents per share. Darden, which operates more than 1,900 casual-dining restaurant units, expects to release final second-quarter earnings Dec. 16, before the market opens.

Darden shares closed down 12.38 percent Tuesday, dipping $5.91 to $41.82.

"At Olive Garden, we're addressing the erosion in one of the brand's essential attributes, its value leadership in casual dining," Darden chairman and chief executive Clarence Otis said in a statement.

Otis said Olive Garden in the quarter worked to contain check growth with promotions and in-store merchandising. "This helped temper the guest count decline for the quarter, but not as much as expected," he said. "As a result, there was more earnings pressure than anticipated."

Otis said the Olive Garden division, to enhance value, would develop new menu offerings across price points, introduce new advertising and remodel older restaurants to enhance the guest experience.

Andy Barish, an analyst with Jeffries & Co., said in a note Tuesday that Darden could manage to turn around Olive Garden's performance, "but it will take some time."

While Olive Garden's second-quarter sales were disappointing, Barish added: "We believe the company is doing the right things to get its core Italian brand back on track. We remain optimistic given Darden's impressive momentum at its key development vehicles [LongHorn and the Specialty Restaurant Group] and strong acceleration in underlying trends at DRI's most challenged and economically sensitive brand [Red Lobster]."

Across its three main brands, Darden said it expected same-store sales growth in the second quarter to be 1.8 percent. At its Specialty Restaurant Group, which includes Seasons 52, The Capital Grille and Bahama Breeze, same-store sales were expected to rise 3.9 percent.

Darden also said it had completed the purchase of Eddie V's Restaurants Inc., adding that concept to the Specialty Restaurant Group. In October, Darden acquired Eddie V's Prime Seafood and Wildfish Seafood Grille in a $59 million cash transaction. The deal adds eight Eddie V's Prime Seafood restaurants and three Wildfish Seafood Grille restaurants in Arizona, California and Texas to its portfolio.

Darden also provided updated sales and earnings for fiscal year 2012. The company expects total sales growth of 6 percent to 7 percent for the year based on combined U.S. same-store sales growth of 2 percent to 3 percent at Red Lobster, Olive Garden and LongHorn Steakhouse, and the opening of 80 to 90 net new restaurants.

"There's good momentum at our other brands, and there's likely to be considerably less cost inflation during the remainder of this fiscal year compared to prior year as costs stabilize at current levels," Otis said.

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