News Column

Darden's Sales Slide at Olive Garden, Red Lobster

June 22, 2012

Sandra Pedicini

Red Lobster

Failing to entice consumers with specials at Olive Garden and Red Lobster during a tepid economic recovery, Orlando-based Darden Restaurants saw sales slide at its two biggest chains during its fourth quarter.

Even so, new restaurants, cost-cutting and growth at its smaller chains helped Darden raise profit 10 percent to $151.2 million, or $1.15 a share, the company reported Friday.

Analysts called the results "disappointing" and "weak" in notes issued after Friday's earnings release. Profit met analysts estimates, but revenue of $2.07 billion did not.

Analysts also were disapointed by the cpmpany's outlook for this year, in which Darden said earnings per share should grow between 8 and 12 percent.

"The resutls they reported and the outlook for 2013 confirm that this is a company that faces some meaningful challenges right now," said Mark Kalinowski of Janney Capital Markets.

Darden executives said Friday they misjudged the effectiveness of promotions at Olive Garden and Red Lobster, where sales at established restaurants slid 1.8 percent and 3.9 percent, respectively.

Its "Taste of Tuscany" promotion focused too much on evoking Italy and not enough on low prices, they said, while a $1 increase in "Festival of Shrimp" may have turned off consumers as well. Also, they said Olive Garden should have advertised on TV around Mother's Day, something the company didn't do because it expected heavy traffic.

"In the current environment, with the competitive challenges, that probably wasn't the right decision," said Drew Madsen, Darden's president and chief operating officer.

The drop in sales were particularly steep in May, and analysts say indications are that June is not going well either for the casual-dining industry.

One analyst said blaming bad promotions was old hat for the company.

"How many times are they going to tell us that?" said Steve West, an analyst with Investment Technology Group. "If they keep saying that story over and over, management's going to start losing credibilty with the street. Actually I think they already have."

The company said high gas prices during the quarter and continued low consumer confidence hurt sales.

"I think people are more fearful than hopeful," chief executive officer Clarence Otis told CNBC Friday morning, citing worries about the European debt crisis and its possible effects on the U.S.

Source: (c) 2012 The Orlando Sentinel (Orlando, Fla.)

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