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Economy catches up with Darden in latest quarter; but acquisitions propel co. to profit gain

ORLANDO Fla. The difficult economic environment caught up with Red Lobster and Olive Garden parent Darden Restaurants Inc. during its February-ended third quarter, as costs rose and sales slowed, a familiar trend for most in the industry.

But helped by the strength of sales at Olive Garden and the newly acquired LongHorn Steakhouse and The Capital Grille chains, Darden was propelled to an 18-percent jump in net profit from a year ago and a 25-percent surge in total sales to $1.81 billion.

The other casual-dining brands in Darden’s 1,683-unit system are Bahama Breeze and Seasons 52.

On a continuing operations basis, which excludes the losses or gains from such discontinued operations as shuttered Bahama Breeze locations and the Smokey Bones brand, which Darden sold late last year, the company's net income fell 1.8 percent to $115.6 million from $117.7 million a year ago. Per-share earnings from continuing operations rose by 1 cent, however, to 80 cents per share. Excluding the integration costs and other accounting adjustments for Darden’s acquisition of Rare Hospitality, the company’s latest-quarter earnings from continuing operations would have totaled 85 cents.

Including discontinued operations, Darden’s net earnings totaled $126.0 million, or 88 cents per share, compared with $106.4 million, or 72 cents per share, a year earlier.

Darden’s sales rose 25 percent to $1.81 billion in the latest quarter, which included $292 million from LongHorn and Capital Grille, both of which Darden acquired last year through the buyout of Rare Hospitality International Inc. Costs to operate the acquired restaurants and increased commodity and labor costs led to a 27.4-percent increase in the company’s total cost of sales.

Olive Garden was the only positive sales performer in Darden’s portfolio of chains, reporting a quarterly same-store sales gain of 5.7 percent, aided by a 10-percent spike in January. Olive Garden boasts 643 locations.

Quarterly same-store sales fell 2 percent at the company’s 678-unit Red Lobster chain and fell 3.3 percent at the 299-unit LongHorn concept. In December, Red Lobster’s traffic was down as much as 6 percent year-to-year and LongHorn’s was off as much as 7 percent, the company reported.

The company’s smaller chains, the 31-unit Capital Grille and the 23-unit Bahama Breeze, posted negative same-store sales results for the quarter of 2.2 percent and 2 percent, respectively.

While Darden’s financial report was issued after the market close on Tuesday, the company’s stock still made headlines, as news of a shareholder lawsuit was revealed. A union pension fund filed earlier this month a complaint that, according to reports, alleges Darden and certain executives misled shareholders about the company’s financial performance last year. The complaint was filed in a federal court in Florida and the plaintiffs, a plumber and pipefitting union, is seeking class-action status for all parties that held Darden stock between June 19, 2007, and Dec. 18, 2007. 

On Dec. 18, Darden revised its earnings and sales projections in the face of stiff headwinds, including reduced customer traffic and increased operating costs. The company’s stock fell 21 percent the day following its announcement and is down about 37-percent from its 52-week high.

According to a report, the complaint alleges that Darden and certain executives inflated the company’s share price last year by giving “materially false and misleading statements” about increased food costs and the performance of its core restaurants. The suit names as defendants CEO Clarence Otis and CFO Brad Richmond.

Darden said its policy is not to comment on pending litigation. The company added that it was proud of its “record of transparency” with the company’s shareholders and with Wall Street.

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