Heard on the call: Darden Restaurants

Heard on the call: Darden Restaurants

Company plans to emphasize value at Red Lobster and grow specialty division

While the economy is showing signs of improvement, consumers remain sensitive about value, executives at Darden Restaurants Inc. said Wednesday.

Darden officials spoke with analysts after reporting a nearly 20-percent increase in profit for the Aug. 29-ended first quarter, which was fueled by increased sales at all of its brands. Click here [3] for full results.

Clarence Otis, Darden’s chairman and chief executive, said industry-wide sales trends have leveled after seeing sequential quarterly improvement from their low levels during the recession. A year ago, he estimated industry sales were down roughly 8 percent.

“To go from that to flat reflects an environment that simply is better,” he said.

The job market is not shedding as many jobs as a year ago, Otis said, “so we think the sequential improvement that we've seen will continue.”

The company discussed how it expected to shore up sales at Red Lobster, which saw same-store sales slip in the latest quarter, and outlined plans for its other brands:

Tweaking promotions at Red Lobster

Darden's largest chains — Red Lobster, Olive Garden and LongHorn Steakhouse — recorded a 1.1-percent increase in blended same-store sales, which reflected positive results at Olive Garden and LongHorn, but a 1.7-percent drop at Red Lobster.

Darden executives blamed the slow sales at Red Lobster on the shift of the chain's annual Endless Shrimp promotion, which last year began in the first quarter but this year kicked off in the current second quarter.

"Red Lobster's softer-than-expected sales results were primarily due to promotional tactics that were not as effective as they needed to be," said Drew Madsen, Darden’s president and chief operating officer. "We are confident, however, in our action plans to strengthen the promotional tactics we will feature over the remainder of this fiscal year.”

Red Lobster’s June promotion of the American Seafood Adventure started at $12.99 and had a seafood Jambalaya dish, which Madsen conceded “was not a compelling enough feature to generate the special visit interest we expected and may have been further hampered by concerns related to the Gulf oil spill.”

A Crabfest promotion starting at $14.99 in July “was probably a little too conservative, especially compared to more aggressive competitive discounts and did not attract as many price-conscious consumers as we anticipated,” Madsen said.

Madsen said the 694-unit Red Lobster would focus more on offering value, because  “while the industry is improving, consumers remain cautious.”

In addition, the chain will move advertising responsibilities to a new agency, Gray Advertising, which is the same company used by 727-unit Olive Garden and the 334-unit LongHorn Steakhouse.

New table-management technology at Olive Garden

Olive Garden has begun rolling out a new table-management system that helps estimate guest counts, which can lead to more efficient staff, Darden executives said.

Brad Richmond, Darden's chief financial officer, said the automated system will “help project guest counts, because now we can measure how many guest are waiting to get into the restaurant that you typically can't capture in our old system.”

"The results at Olive Garden have been pretty meaningful," he said.

Chief executive Otis said the system is in place at about 150 of Olive Garden's restaurants and that the company expects to roll it out chainwide before the holidays.

Brad Ludington, an analyst with KeyBanc Capital Markets Inc., said in a report this week that the system would help Olive Garden turn tables faster and that it was likely that Darden would roll out the technology to some of its other brands.

Growth plans for Seasons 52 and The Capital Grille

Improvements in business travel and entertainment spending helped the 41-unit Capital Grille book a 2.7-percent increase in same-store sales in the first quarter, said Gene Lee, president of Darden’s specialty restaurant group, which also includes the 11-unit Seasons 52 and the 25-unit Bahama Breeze.

“As far as traffic and average check, we're still seeing pressure in average check, primarily being driven by reduction add-on sales and reduction alcoholic beverage,” Lee said.

Darden does see opportunities for expanding its higher-end specialty restaurants. Last month, Seasons 52 president Stephen Judge said the company expects to add at least seven restaurants over the next year and a half. [4]

“Not a lot of new high-end restaurants are being built out there, which is providing us an opportunity from a development standpoint,” Lee said. “We're well along the way with adding additional Seasons 52 and Capital Grille. And we believe the environment right now is a good time for us to grow both of these brands.”

Outlook on food costs

Darden’s first-quarter earnings were helped by food and beverage expenses that were 77 basis points lower than the same period last year, executives said, though the second half of the fiscal year may bring price increases.

“We have continued to benefit from lower commodity prices in the first quarter of this fiscal year, and we expect that will continue into the second quarter,” Richmond said. “In the second half of the fiscal year, commodity prices are likely to be slightly higher to the prior year with an expected increase of approximately 0.5 percent.”

Orlando, Fla.-based Darden operates 1,832 restaurants in the United States and Canada.

Contact Ron Ruggless at [email protected] [5].