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Darden Restaurants, Inc. : Darden Cuts Year Guidance, Cites Payroll Tax, Gas

02/22/2013 | 09:45am US/Eastern
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--Darden lowers its earnings forecast for the fiscal year

--Expects same-restaurant sales for fiscal third quarter to decline

--CEO says more work needs to be done at Olive Garden and Red Lobster

Darden Restaurants Inc. (DRI) says it will make less money this year than it previously thought, as the owner of Olive Garden and Red Lobster is feeling the pressure of consumers pinched by higher taxes and gas prices.

With its latest caution, Darden is piggy-backing on many other restaurants and retailers that have blamed the economy for their slowing sales. But Darden has been struggling for a while.

Coming out the recession, rivals like Chili's Grill & Bar and Applebee's shelled out deep discounts while Darden held its menu prices steady to protect profit margins, and in turn, lost customers.

The company has been making efforts to appear more affordable and remodel its older, tired restaurants. But the turnaround is proving tougher than it expected.

"While results midway through the third quarter, [which will end Sunday], were encouraging, there were difficult macro-economic headwinds during the last month," Chief Executive Clarence Otis said. Two of the most prominent culprits were increased payroll taxes and rising gasoline prices.

"We think that some of our guests may have visited our restaurants much less in January and February as they saw a lower amount of take home pay," Mr. Otis said in a memo to employees Friday.

Olive Garden, Red Lobster and LongHorn Steakhouse combined are expected to post a same-restaurant sales decline of 4.5% for the quarter, hurt also by more-severe winter weather this year than last.

Despite Darden's negative outlook, investors are buying up shares Friday. The company's poor performance already was valued into the stock, which had fallen 15% over the past three months as of Thursday and has been trading below its peers, said Janney Capital Markets analyst Mark Kalinowski. He upgraded his rating of the stock to "buy" from "neutral," saying it looks like the "classic "buy on bad news" opportunity."

The recently restored federal payroll tax has left Americans with 2% less money to spend this year. That means someone making $50,000 a year will take home about $80 less each month--money that could be used to splurge on an extra drink or dessert.

Restaurant analyst Bonnie Riggs, from market research firm NPD Group Inc., said that three weeks ago, which is about when consumers likely saw the impact of the higher payroll tax in their paychecks, restaurants reported a 4% decline in same-store sales, marking the first industrywide, weekly decline that NPD has seen in more than a year and a half.

"There's just a lot of angst among consumers, and I don't see that changing much in the foreseeable future," Ms. Riggs said.

Mr. Otis said Darden is happy with the changes it has made to offer better deals to its customers but admits that its chains still have a long way to go.

"In today's economy, lower prices are, in fact, more important than ever," Mr. Otis said in the memo. "During the early stages of this transition, we know that our efforts won't always deliver the results we hope for, but we are confident our new direction will soon be more consistently successful."

For the year, Darden now expects earnings from continuing operations of $3.06 to $3.22 a share on sales growth of 6% to 7%, down from its previous view of $3.29 to $3.49 a share in earnings on 7.5% to 8.5% sales growth.

Darden said it expects fiscal third-quarter earnings from continuing operations between $1 and $1.02 a share, below estimates of $1.13 from analysts surveyed by Thomson Reuters.

For the quarter, same-restaurant sales are expected to be down 7% at Red Lobster, down 4% at Olive Garden and down 1.5% at LongHorn Steakhouse. Darden's specialty restaurant group, which includes Yard House, Seasons 52 and others, is expected to see same-restaurant sales rise 2%.

The company will host an investor meeting on Monday and Tuesday and plans to release its quarterly results March 22.

Write to Annie Gasparro at annie.gasparro@dowjones.com and Ben Fox Rubin at ben.rubin@dowjones.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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