News Column

Darden Warns Q3 Earnings Won't Meet Expectations

Feb. 22, 2013

Sandra Pedicini, Orlando Sentinel

Olive Garden restaurant in Massachusetts. (Anthony92931, Creative Commons)
Olive Garden restaurant in Massachusetts. (Anthony92931, Creative Commons)

Blaming the payroll tax increase, rising gas prices and severe weather, Darden Restaurants warned investors Friday of a difficult third quarter and reduced its outlook for the year.

The Orlando-based company said it expects sales at established restaurants for its three biggest brands -- Olive Garden, Red Lobster and LongHorn Steakhouse -- to be down 4.5 percent for the quarter that ends Monday. It expects earnings per share to be $1 to $1.02, compared with analysts' estimates of $1.12.

For the fiscal year that ends in May, Darden cut its earnings outlook to between $3.06 and $3.22 per share. In December it had predicted between $3.29 and $3.49 a share.

Darden chief executive officer Clarence Otis sent a memo to employees Friday insisting the company remains "the envy of our competitors." The company is focused on offering more discounts to lure consumers wary of spending, he said.

"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," Otis told employees.

The economic climate has made things for restaurants in general, said Steve West, an analyst with Investment Technology Group.

"People are saying, 'I've got 2 percent less in my wallet, gas prices are ripping right now -- where am I going to sacrifice?' " West said, referring to the payroll tax jump that hit in January.

Even so, Darden's stock had risen by 2 percent Friday morning, as one analyst upgraded the stock.

Mark Kalinowski of Janney Capital Markets said in a research note that Darden's woes might have bottomed out, and "we believe a lot of the bad news about DRI is already in the stock at this point."

Darden also has a high dividend yield, and if the company slashes its capital expenditures significantly, that could signal the company will focus more on running its existing restaurants well.

Darden has already said it is looking at cutting a $750 million budget for expansion and remodeling by about 10 percent next year

Christopher O'Cull of KeyBanc Capital Markets, though, maintained a neutral rating, saying in a research note that Darden's issues appear not only to be the result of economic pressures "but also by the lack of a compelling proposition for guests."

The company is holding a two-day session with analysts that begins Monday in Orlando. It will report third-quarter earnings on March 22.

spedicini@tribune.com or 407-420-5240

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