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Olive Garden woes drag down earnings at Darden Restaurants

Darden's net income falls 28% during its second quarter as its largest single chain continues to shed customers.

December 17, 2011|By Tiffany Hsu, Los Angeles Times

Poor sales at the Olive Garden chain are weighing on Darden Restaurants Inc., which saw earnings slide 28% in its second quarter on the Italian eatery's poor performance.

Net income fell to $53.7 million, or 40 cents a share, from $74.5 million, or 53 cents, a year earlier. Revenue for the quarter, which ended Nov. 27, was up 6.1% to $1.83 billion.

Olive Garden's shaky footing has been throwing Orlando, Fla.-based Darden off balance for a while and the chain needs to get "back on track," executives said. With more than 750 restaurants, dozens of them in California, Olive Garden makes up the largest single segment of Darden's 1,900 outlets.

Analysts said that the Italian chain is undergoing an identity crisis and that many consumers no longer think it offers good value.

Meanwhile, competition from chains such as Applebee's and T.G.I. Friday's is much more formidable now, said analyst Bob Derrington with Morgan Keegan.

"It's not only the variety of choices consumers have now," he said. "It's that the competition is more aggressive with their price points. And there are just more culinarily interesting restaurants out there."

Same-store sales at Olive Garden — sales at stores open at least a year — were down 2.5% for the quarter, with a 5.7% year-over-year decline in November alone. Even shifting advertising strategies, plans to remodel older restaurants and promotions such as a never-ending pasta bowl have been unable to stem the outflow of customers.

Darden Chief Executive Clarence Otis also blamed the disappointing results on "pressure on check averages as guests continue to be cautious about spending and unfavorable year-over-year food costs."

Olive Garden's performance prompted Darden to slash its 2012 earnings outlook this month. The company said it expected earnings per share to increase 4% to 7% instead of the 12% to 15% it predicted earlier in the fall. Revenue next year is expected to be slightly less than Darden had previously anticipated.

"This is not a problem with one of their small fledgling chains," Derrington said. "It's the company's core business — its biggest brand and most profitable one too."

Darden has used its stronger brands as a crutch as it attempts to buoy Olive Garden. Red Lobster's same-store sales were up 6.8% in the quarter and LongHorn Steakhouse saw a 6% increase. Darden's wine bar and grill chain Seasons 52 pulled in 2.9% more revenue at locations open more than a year, while the Caribbean cuisine at Bahama Breeze saw a 0.5% uptick and the Capital Grille steakhouse restaurants attracted 5.7% more in sales.

In its second quarter, Darden also shelled out $59 million to acquire Eddie V's Prime Seafood and Wildfish Seafood Grille.

The earnings report, which was released before the market opened, sent Darden shares down less than a percent from Thursday, to $43.68. The stock has fallen 9.3% year over year.

The casual-dining sector has had a rough year across the board. Customers are increasingly jumping ship for cheaper fast-casual chains such as Panera Bread and Chipotle Mexican Grill.

Some sit-down restaurants have even launched fast-casual offshoots such as IHOP Express, Denny's Cafes and Red Robin's Burger Works in an attempt to compete.

For now, though, casual dining is still one of the industry's largest revenue generators, predicted to pull in $108 billion this year, according to research group Mintel. Fast food will bring in $178.7 billion, while family midscale eateries such as Denny's will grab $41 billion and fast-casual restaurants are on track to end the year with $24 billion, Mintel found.

tiffany.hsu@latimes.com

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