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What’s Cooking at Darden Restaurants: Fishy Explanations for Profit Shortfalls

Dee Gill

Darden Restaurants (DRI) is in particular need of an earnings report with no unpleasant surprises, and perhaps the profit warning it issued in late February will keep expectations suitably muted for the March 22 third quarter announcement. But if there is bad news to be delivered, we look forward to hearing management’s explanation for it.

Restaurants companies traditionally offer some of the more interesting explanations for earnings results, and some of Darden’s have been particularly creative. For example, few companies discuss Lent in earnings sessions as much as Darden. Last year, Darden said the timing of Lent hurt its sales because it coincided with a spike in gasoline prices. Also, they didn’t advertise on Mother’s Day, and there was some problem with the Taste of Tuscany promotion.

The profit warning for second quarter earnings, delivered December 20, blamed bad publicity over its health care policy for its low sales, earning and cash figures. It’s true that Darden’s Olive Garden and Red Lobster restaurants took some heat for threatening to bypass Affordable Care Act costs by relying on more part-time workers, which employers don’t have to insure. But management at Papa John’s International (PZZA) and Applebee’s owner Dine Equity (DIN) were criticized for expressing the same sentiment. Only Darden among casual dining stocks claimed to be seriously affected by the flap.

DRI Chart

Darden’s more basic problem these days is the one it spelled out in that most recent profit warning, which was delivered Feb. 22. That one explained how consumers are leery of spending money even as signs of economic recovery grow. Darden blamed the payroll tax hike Jan. 1 and bad winter weather. A lot of other consumer-dependent companies concurred.

Darden has a pretty solid long-term track record with shareholders, both for exemplary share price gains and a rising dividend, as seen in a stock chart.

DRI Chart

But investors started losing faith after that first profit warning, and the second didn’t help. It reported same store sales down in each of the past three months, at each of its three main restaurants, with one minor exception. (LongHorn Steakhouse, the third, reported a 0.1% gain in January.) Overall same store sales, it said, would probably decline 1.5% to 2.5% this fiscal year. It’s doubtful that a Lent-based explanation will fly if there are unwelcome surprises in the next report.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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