Darden Sees Need for 'Affordability' at Olive Garden

Friday, 23 Mar 2012 02:23 PM

 

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Darden Restaurants Inc.'s Olive Garden chain, which generates almost half of the company's revenue, posted its first rise in quarterly same-restaurant sales in more than a year, but executives warned that customers are still worried about spending.

Much of the improvement at Olive Garden came from factors beyond its control, like mild winter weather. An early Catholic Lenten season also boosted sales at Darden's Red Lobster seafood chain.

Chief Executive Clarence Otis told analysts on a call that "the need for affordability continues" for Olive Garden's "more economically challenged guests."

Gas prices and the sluggish job market are among the factors still worrying customers, he and other Darden executives said on the call.

The company, one of the largest in the casual dining sector, has been less hard hit than rivals by high food costs and the slow economic recovery, but investors were looking for clearer evidence of strength in business at its top chains.

U.S. same-restaurant sales rose 6 percent at Red Lobster, which generates a third of overall sales, and were particularly high in February. But Darden said most of that February increase came as the Catholic season of Lent landed in Darden's third quarter this year, instead of the fourth quarter as happened a year earlier.

Red Lobster schedules its LobsterFest specials during the Lenten season, when some Christians avoid meat.

Despite the strong numbers for the third quarter ended Feb. 26, Darden stuck with its full-year sales forecast.

On the call, Otis hesitated for several seconds before answering an analyst who asked whether that meant same-restaurant sales might dip in the current quarter at Red Lobster.

That "deafening silence" and "a response that failed to unambiguously refute the possibility" hit Darden's shares despite an otherwise strong set of results, Lazard Capital Markets analyst Matthew DiFrisco said in a research note.

Darden shares fell 2 percent to $50.79 at mid-afternoon on the New York Stock Exchange.

DiFrisco himself is more bullish and expects Red Lobster's same-restaurant sales to be up 1.5 percent this quarter.

OLIVE GARDEN UP

At Darden's main three chains - Olive Garden, Red Lobster and LongHorn Steakhouse - U.S. same-restaurant sales were up a combined 4.1 percent, helped by moderating food cost increases and a rise in customer visits.

Sales at Olive Garden's U.S. restaurants open at least 16 months were up 2 percent during the third quarter, with the biggest rise coming in February, which was unusually mild across much of the country.

Darden had not reported a quarterly rise in Olive Garden same-store sales since the period ended Nov. 28, 2010.

Darden sees U.S. same-restaurant sales at its main three chains rising by 2.5 to 3 percent this year.

The company, which has reworked menus and increased promotions at the Italian-themed Olive Garden chain, affirmed its forecast for growth of 4 to 7 percent in full-year earnings per share from continuing operations.

Earnings at the Orlando, Florida-based company were $164.1 million, or $1.25 a share, from continuing operations, for the third quarter, up from $151.2 million, or $1.08 a share, a year earlier. That beat Wall Street forecasts by a penny, according to Thomson Reuters I/B/E/S.

Overall sales rose 9.3 percent to $2.16 billion, above analysts' average forecast of $2.14 billion.

Darden's smaller chains include The Capital Grille and Bahama Breeze.

© 2014 Thomson/Reuters. All rights reserved.

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