Darden Restaurants, Inc. : Darden Profit Rises; Updates to Olive Garden Under Way
09/21/2012| 07:56am US/Eastern
--Darden's first-quarter profit rises 3.9%, shares up
--Continues to shift its focus to affordability at Olive Garden, Red Lobster
--Sees faster growth at its smaller, specialty restaurant chains
Darden Restaurants Inc. (DRI), which posted stronger-than-expected quarterly earnings Friday, said the struggling economy and latest fads are forcing it to update Olive Garden and Red Lobster to make them feel more affordable and trendy to consumers.
Darden, which also owns LongHorn Steakhouse and a few smaller chains, has seen its business fluctuate with the shaky economy. Like the rest of the industry, it is continually challenged to offer good deals for cost-conscious customers, while facing higher food costs and tougher competition.
Darden's fiscal first-quarter profit improved 3.9%, as sales at its smaller specialty chains offset some weakness at its core brands, sending shares up 4.4% to $57.10.
"The market is changing, and we need to be changing with it," Chief Financial Officer Brad Richmond said in an interview. "Olive Garden was doing well for so long, that it was reluctant to change, and look what happened," he added, acknowledging that the chain--which makes up almost half of the company's revenue--has seen guest traffic slip recently.
Olive Garden has attributed its struggles to a marketing strategy that highlighted culinary expertise rather than value. As it shifts to more price-centric promotions, it expects to attract more guests.
In addition to its "more affordable" mantra, Darden also is planning major menu make-overs, restaurant remodels and new marketing campaigns.
While some industry analysts worry the changes could alienate long-time customers, Darden says it needs additions like "small plates" and lighter dishes at Olive Garden and more non-seafood options at Red Lobster in order to appeal to more demographics.
"The biggest risk in a changing environment is to not change," Chief Executive Clarence Otis said.
Darden also is turning to its "specialty restaurant group," which includes higher-end chains such as Capital Grille and Bahama Breeze, for new restaurant growth, knowing it will eventually top out on expansion of Olive Garden and Red Lobster in the U.S.
Darden expects its latest acquisition--a trendy pub-style chain called Yard House--to lead the way.
For the quarter ended Aug. 26, the specialty restaurant group's same-restaurant sales--those at restaurants opened at least 16 months--increased 2.2%. Olive Garden, Red Lobster and LongHorn Steakhouse combined saw a 0.3% drop by that measure.
Contrary to its intention to focus on value, Olive Garden raised the price of its annual "never-ending pasta bowl" promotion that's running now. Analysts questioned whether the deal, which usually boosts sales this time of year, will gain less traction this year because of the $1 price increase to $9.95.
"We do know that higher prices, by themselves, are probably over time going to have a downward impact on traffic for some guests on some occasions. We might have seen some of that at Olive Garden" in late August when "never-ending pasta bowl" began, said Chief Operating Officer Drew Madsen.
The move was warranted by higher food and labor costs, he said, noting that it had held the price for the past five years. In addition, Mr. Madsen said, by preventing margin contraction now, it can offer more promotions later in the year.
Miller Tabak analyst Stephen Anderson said Darden's recent results indicate "customers are responding well to the company's value messaging," as Olive Garden posted its first positive same-restaurant sales growth in six quarters, and Red Lobster's results "were not as bad as feared" given that they compared to a 10.7% jump from a year ago.
By chain, Darden's same-restaurant sales rose 0.3% at Olive Garden, fell 2.6% at Red Lobster and increased 3.6% at LongHorn in the quarter, beating analyst predictions, according to Thomson Reuters.
Darden reported an overall profit of $110.8 million, or 85 cents a share, up from $106.6 million, or 78 cents a share, a year earlier. Sales rose 4.8% to $2.03 billion. Analysts were expecting earnings of 84 cents a share on revenue of $2.03 billion, according to Thomson Reuters.
--Ben Fox Rubin contributed to this article.
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