Darden's Olive Garden to embrace value deals

Sat Jun 23, 2012 12:29am IST

A man talks on his mobile phone in front of the Times Square Olive Garden in New York, June 23, 2010. REUTERS/Keith Bedford

A man talks on his mobile phone in front of the Times Square Olive Garden in New York, June 23, 2010.

Credit: Reuters/Keith Bedford

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(Reuters) - Darden Restaurants Inc (DRI.N) forecast full-year profits below Wall Street's view and vowed to step up value-priced promotions aimed at luring more diners to its Olive Garden and Red Lobster chains, sending its shares down 1 percent.

Darden forecast fiscal 2013 earnings growth of 8 percent to 12 percent, which works out to a range of $3.87 to $4.01 per share. That was below analysts' average estimate of $4.05, according to Thomson Reuters I/B/E/S.

Darden has been slow to adopt the types of discounts that competitors long have used to bring in customers, analysts said.

The tweak to its strategy came after a disappointing quarter that saw demand fall at full-service dining chains like those Darden operates, hampered by higher gasoline prices.

"The competitive environment's been tough with a frustratingly slow economic recovery that's constrained consumers," Chief Executive Clarence Otis said on a conference call with analysts.

Darden historically has been one of the restaurant industry's top operators and it easily outperformed rivals during the depths of recession and the early days of the recovery.

But that has changed as rivals such as DineEquity Inc's (DIN.N) Applebee's and Brinker International Inc's (EAT.N) Chili's Grill & Bar close the gap and perfect low-price menus.

Darden is "slowly coming around to doing the things that their competitors have been doing for awhile. They were caught on their back heels and are still a little bit behind," Bernstein Research analyst Sara Senatore said.

Olive Garden next week will start a "two for $25" promotion that offers unlimited soup or salad, two entrees and the choice of either an appetizer or dessert.

Applebee's and Chili's have been running "two for $20 promotions" for several years, Senatore said.

SALES FALL SHORT

Same-restaurant sales at Darden's "Big Three" brands - Olive Garden, Red Lobster and LongHorn Steakhouse - fell 1.9 percent overall for its fiscal fourth quarter that ended May 27. Analysts were expecting a rise of at least 1 percent.

Traffic to Olive Garden restaurants, which generate almost one-half of Darden's revenue, fell during the latest quarter. That contributed to a 1.8 percent decline in sales at Olive Garden restaurants open at least 16 months.

Darden has been working to fix marketing at Olive Garden for more than a year. Executives on Friday blamed last quarter's miss on a lackluster "Taste of Tuscany" promotion and a decision not to advertise around Mother's Day.

Same-restaurant sales at Red Lobster fell 3.9 percent, hurt by the timing of its Lenten season Lobsterfest promotion and higher gas prices.

Sales were up 3 percent at LongHorn Steakhouse, but that still fell short of analysts' expectations.

Darden's quarterly profit from continuing operations rose almost 10 percent to $151.6 million, or $1.15 per share, matching analysts' view as compiled by Thomson Reuters I/B/E/S. That was up from $138.0 million, or $1 per share, a year earlier.

Overall sales rose 3.8 percent to $2.07 billion, falling short of analysts' estimate of $2.11 billion.

"This clearly was a disappointing quarter for (Darden) that will have ramifications today throughout most of the full-service dining universe," Miller Tabak analyst Stephen Anderson said in a client note.

Darden shares were down 50 cents, or 1 percent, to $49.89 in afternoon trading on the New York Stock Exchange. Shares in Brinker were down 0.9 percent, while DineEquity's were off 0.3 percent.

(Reporting by Lisa Baertlein in Los Angeles and Aditi Shrivastava in Bangalore; Editing by Supriya Kurane, Jeffrey Benkoe, Tim Dobbyn and Phil Berlowitz)

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