Olive Garden and Red Lobster owner Darden Restaurants Inc. said it expects commodity costs to rise 1 to 1.5 percent in the second half of this fiscal year, contributing to a share drop of 6.3 percent.
Darden's share sell-off started in after-hours trading Monday, when the Orlando, Florida-based restaurant operator reported in-line fiscal second quarter earnings despite disappointing sales results at its Red Lobster seafood chain.
Darden's food and beverage expenses were slightly lower than last year on a percentage of sales basis in the second quarter, which ended Nov. 28. The company expects those costs to be flat for the full fiscal year.
Weak demand has driven down costs for many food items, but costs for some commodities, including wheat and beef, are rising. Some investors worry that those higher costs could threaten a modest recovery at casual dining restaurants like those operated by Darden.
"We have most of our commodity needs locked in for fiscal 2011, offering us good visibility on our cost for the next two quarters," Darden Chief Financial Officer Brad Richmond said on a conference call with analysts.
Nevertheless, Darden said wheat costs were "much higher" at Olive Garden in the second quarter, versus the year earlier.
Darden, also operator of the LongHorn Steakhouse and Capital Grille chains, said it would take steps to lock in prices for a bigger portion of its beef purchases.
Beef accounts for about 14 percent of Darden's food costs and the company currently has about a quarter of its beef purchases contracted — less than any other major commodity.
Shares in Darden were down $3.17 to $47.26 in afternoon trading on the New York Stock Exchange.
McDonald's Corp. in November raised menu prices in mainland China to offset higher food costs in the world's fastest-growing major economy.
A month earlier, executives signaled that the world's biggest restaurant chain could push through some menu price increases next year to cover higher commodity costs.
CALORIE DISCLOSURE TEST
Separately, the U.S. healthcare law passed in March will require many restaurant chains to clearly post calorie counts on menus as early as next year.
Darden said it has been testing calorie disclosure in 85 Olive Garden, Red Lobster and LongHorn restaurants since late October. The company already discloses calories on menus in New York City, Philadelphia and King County, Washington, as required by laws in those jurisdictions, a spokesman said.
So far, calorie disclosure does not appear to have resulted in meaningful changes in ordering behavior, said Drew Madsen, Darden's president and chief operating officer.
"We've got a handful of restaurants that already disclose calories today and we have not seen meaningful menu mix change," Madsen said.
If calorie disclosure were to cause "sticker shock," it would be evident at Olive Garden, which sells a 1,030-calorie, deep-fried Lasagna Fritta appetizer that the Center for Science in the Public Interest dubbed "food porn" due to its high calorie, fat and sodium counts.
Early research from New York City, a pioneer with its 2008 law that put calorie counts on menus there, showed diners there have made modest changes to what they order. The jury is still out with regard to the law's long-term effects on behavior.
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