| Analysts concerned over Darden’s slow sales trends
By Sarah E.
Lockyer
ORLANDO, Fla.
(Oct.
5,
2009)
Editor’s note: Analyze This is a quarterly look at a publicly traded restaurant company that has sparked discussion, for better or worse, among securities analysts. The comments do not necessarily reflect the views of Nation’s Restaurant News nor should any statement be construed as a recommendation to buy or sell any security.
Casual-dining bellwether Darden Restaurants Inc. completed its latest quarter with mixed results, as sales trends remained weak but profit rose on cost controls and improved restaurant margins.
Analysts and observers said they were disappointed that the parent of such chains as Red Lobster, Olive Garden and LongHorn Steakhouse was not able to post improved same-store sales -- a negative sign for the casual-dining segment as a whole. Darden’s same-store sales remained negative in June, July and August, and executives said trends so far in the current quarter remained about the same.
The company’s net income for the quarter ended Aug. 30 totaled $94.3 million, or 67 cents a share, up 15 percent from the same quarter a year ago, when earnings totaled $82.1 million, or 58 cents a share. First-quarter sales fell 2.3 percent to $1.73 billion.
Blended same-store sales for Olive Garden, Red Lobster and LongHorn Steakhouse fell 5.3 percent, which reflected domestic same-store sales declines of 2.9 percent at Olive Garden, 7.9 percent at Red Lobster and 6.2 percent at LongHorn Steakhouse.
Clarence Otis, chairman and chief executive of Darden, said corporate expenses were helped in the quarter by favorable food and energy costs and an “increasingly efficient restaurant support platform.” Darden’s total cost of sales fell 4.1 percent from a year ago.
“As a result of our marketing, restaurant operations and restaurant support strengths, we look forward to emerging from the current challenging environment as a company that’s even better positioned competitively,” he said.
Jeff Farmer, Jefferies & Co.
Farmer suggested that Darden’s most recent sales slump can partly be blamed on the discounting strategies of other casual-dining chains. While Olive Garden and Red Lobster are lower-priced concepts, they have not promoted combo meals, such as those at Applebee’s or Chili’s, and have not lowered prices to the $5 price point like at T.G.I. Friday’s.
“That Olive Garden and Red Lobster same-store sales remained soft into August — down 2.5 percent and 6 percent, respectively — underscores the fact that aggressive promotional discounters, i.e., Chili’s with its 3 for $20 promotion, are clearly winning the short-term market share battle,” he said. “Most investors were aware that Red Lobster got off to a slow start in June, but it was a big surprise that the softness persisted throughout the quarter.”
While discounting may work for the short term, Farmer said Darden is most likely the best positioned to “weather the discounting storm with significant concept, marketing scale and operations advantages.”
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