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Darden Restaurants cuts 2012 earnings outlook

December 6, 2011
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ORLANDO, Fla.—Darden Restaurants Inc. cut its fiscal 2012 outlook on Tuesday as it tries to improve results at its struggling Olive Garden chain and higher costs outstrip price increases.

The company, which also owns Red Lobster, LongHorn Steakhouse and other restaurants, slid $4.97, or 10.4 percent, to $42.76 in morning trading. Over the past year, the shares have traded between $40.69 and $53.81.

Darden is spending to help Olive Garden -- its biggest chain -- regain its position as a popular value-oriented chain, said CEO Clarence Otis in a statement. The company curbed price increases across its restaurant brands, which hurt profit because its food costs are rising.

Sara Senatore of Bernstein Research said in a client note that making limited price hikes hurt Darden's second-quarter operating margin. The analyst said prices fell 1.7 percent at Olive Garden, dropped 2.2 percent at LongHorn Steakhouse and climbed 2.9 percent at Red Lobster during the quarter, which was not enough to fully cover rising food costs.

The company now expects 2012 earnings per share from continuing operations to grow 4 to 7 percent. Darden predicted in September that 2012 earnings per share would increase 12 to 15 percent, probably at the low end of that range.

The revised guidance implies adjusted earnings of $3.55 per share to $3.65 per share for the year ending in May 2012.

Analysts surveyed by FactSet had expected earnings of $3.77 per share.

The Orlando, Fla., company now expects full-year revenue to increase 6 to 7 percent, down from its prior forecast for a 6.5 to 7.5 percent rise. This implies revenue of $7.95 billion to $8.02 billion.

Wall Street predicts revenue of $7.98 billion.

Darden used promotions and different merchandise strategies at Olive Garden to keep customers' checks down during the September-November quarter.

"This helped temper the guest count decline for the quarter, but not as much as expected. As a result, there was more earnings pressure than anticipated," Otis said.

Senatore said she thinks Olive Garden is having a tough time keeping up with growing competition and is being cannibalized a bit by its own new restaurants.

Otis said Olive Garden is coming up with new promotions and core menu offerings at various prices and plans to remodel some of its older restaurants. It's also developing new ads.

For the second quarter, Darden expects earnings of about 41 cents per share. Analysts had expected earnings of 54 cents per share.

Darden expects revenue at U.S. restaurants open at least a year to rise 1.8 percent increase for Red Lobster, Olive Garden and LongHorn Steakhouse. It predicts a 3.9 percent increase for its other chains, which include Eddie V's, The Capital Grille, Bahama Breeze and Seasons 52.

The company will report its second-quarter results on Dec. 16.

Darden also announced Tuesday that it closed on its $59 million acquisition of Eddie V's Restaurants Inc. in the second quarter. The transaction is expected to be neutral to its full fiscal year earnings per share.

Darden owns and runs more than 1,900 restaurants.

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