Poor Promos Let Down Darden's 2Q

Zacks

Darden Restaurants Inc. (DRI) recently cut its revenue and earnings per share growth outlook for 2013 citing underperformance at the same-store sales of three of its brands –Olive Garden, Red Lobster and LongHorn Steakhouse in the second quarter.

Failure of promotional offer amid a value-sensitive environment primarily spoiled Darden’s party in the second quarter of 2012. Apart from that, Superstorm Sandy and the transaction and closing costs related to the purchase of Yard House, USA Inc. were unfavorable to Darden this quarter, affecting earnings per share by five cents and a penny, respectively.  

Orlando, Florida-based Darden foresees its sales growth for fiscal 2013 in the range of 7.5– 8.5% (prior expectation was 9.0 –10.0%) based on about -1.0–0.0% (prior increase of 1–2%) in the blended same-store sales estimate for its three core brands. The acquisition of Yard House will likely stimulate overall sales.

Darden also expects to earn from continuing operations $3.29– $3.49 per share for fiscal 2013, which includes approximately 8–10 cents of transaction and closing costs associated with the purchase of Yard House USA, Inc. Earlier, Darden had expected its earnings per share to increase in the range of 5– 9% that translates to around $3.76– $3.90.

Darden now expects to report 25–26 cents in earnings per share from continuing operations in the second quarter. The second quarter’s promotional offers were in line with the successful offers Darden made earlier. However, the offers lacked the innovation as offered by its competitors. Additionally, the promotions did not suit financially weak customers at the current level.

This is not the first time promotional failure affecting Darden. Notably, in fourth-quarter 2012, the Taste of Tuscany promotion that started in May and continued into June was less effective and became one of the eventual causes for same-store sales decline.

In the second quarter, Olive Garden reported negative comps in all three months while Red Lobster’s comps growth declined over two months with October witnessing the sharpest fall of 7.0%. LongHorn Steakhouse which was a better-placed brand till recently, also delivered negative comps in each month of the quarter confirming the wavering consumer confidence in the U.S.

However, in order to improve the impact of its unsuccessful promotions, management is bringing about changes in dishes and services. Furthermore, management remains keen on modification of its promotional calendar and deployment of brand-appropriate affordability to match the consumers’ wallets as well as taste buds.

Darden, which competes with Kona Grill Inc. (KONA) and Brinker International Inc. (EAT), currently carries a Zacks #4 Rank that translates into a short-term 'Sell' rating. We also maintain our long-term Neutral recommendation on the stock.

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