Olive Garden parent cuts profit outlook

ORLANDO, Fla. — Darden Restaurants Inc. is cutting its profit forecast for the year, with the owner of Olive Garden and Red Lobster blaming failed promotions and negative publicity generated by its tests to limit health care costs for workers.

The company’s stock tumbled nearly 10 percent.

Darden Chairman and CEO Clarence Otis said Tuesday that the company’s promotions didn’t resonate with as well with “financially stretched” diners as those of competitors during its fiscal second quarter. He said the disappointing results show the need for bold changes and that Darden would revise its promotional calendars to better fit with the financial realities of diners.

For the quarter, the company expects revenue at Olive Garden, Red Lobster and LongHorn Steakhouse locations open at least a year to be down about 2.7 percent. At its much smaller specialty restaurant group, it expects the figure to rise 0.7 percent. The metric is a key measure of health because it strips out the impact of recently opened or closed locations.

Darden, based in Orlando, Fla., said it expects a profit from continuing operations of 25 cents or 26 cents per share for its second quarter, which ended Nov. 25. Not including one-time items, it expects 31 cents per share to 32 cents per share.

By that measure, analysts polled by FactSet had expected earnings of 46 cents per share.

The company is cutting its outlook for its full fiscal 2013 as well, noting that the more downbeat guidance reflects the potential impact of bad publicity. In October, the company had said it was putting more workers on part-time status in a test aimed at limiting costs from President Barack Obama’s health care law.

Under the new law, companies with 50 or more workers could be hit with fines if they do not provide basic coverage for full-time workers and their dependents. Those penalties and requirements could significantly boost labor costs for some companies, particularly in low-wage industries such as retail and hospitality, where most jobs don’t come with health benefits.

The company projected a fiscal 2013 profit from continuing operations of $3.29 to $3.49 per share, which includes about 8 cents to 10 cents of transaction and closing costs related to the Yard House acquisition. Its previous guidance was for earnings of $3.76 to $3.90 per share. Analysts had expected $3.87 per share.

That guidance is based on expectations of total sales growth of between 7.5 percent and 8.5 percent, boosted by contributions from about 100 new restaurants, not including the initial 40 Yard House restaurants operating at the close of the acquisition. It previously projected a revenue increase of 9 percent to 10 percent.

Revenue at Red Lobster, Olive Garden and LongHorn Steakhouse restaurants open at least a year is expected to be flat to down 1 percent.

The announcement comes just weeks after the company announced several changes at its flagship chains. At Olive Garden, Darden is updating its marketing and putting a greater emphasis on value and lighter fare. At Red Lobster, the company is expanding its menu to appeal to diners who might not like seafood.

Based on the company’s fiscal 2012 revenue of $8 billion, the new guidance projects fiscal 2013 revenue of $8.6 billion to $8.68 billion. Analysts had expected $8.75 billion. Darden plans to release its final fiscal second-quarter sales and earnings results before the markets open on Dec. 20.

Darden shares fell $5.18, or 9.9 percent, to $47.24, after dropping as low as $47.03. Over the past 52 weeks, the company’s shares have traded between $41.65 and $57.93.

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