September 28, 2011 / 11:26 AM / 6 years ago

UPDATE 5-Diners are getting frugal, Olive Garden parent says

* Darden EPS from cont ops 78 cents, matching Street view

* August same-restaurant sales hurt by Hurricane Irene

* Diners ordered fewer appetizers, drinks and desserts

* Shares fall almost 6 percent (Adds analyst comments, updates stock activity)

By Lisa Baertlein

Sept 28 (Reuters) - Darden Restaurants Inc (DRI.N) said it will beef up promotions to lure diners to its Olive Garden, Red Lobster and LongHorn Steakhouse restaurants, hoping to reverse a spending pullback that hurt quarterly results.

Darden reported a 6 percent slide in fiscal first-quarter profit on Wednesday as diners tightened their belts more than expected during a summer of economic and political turbulence.

Higher food costs, more promotions and fewer add-on sales squeezed margins, analysts said. Darden shares closed down 5.7 percent to $44.30 in afternoon trading.

"Fewer appetizers, drinks and desserts were purchased," Chief Financial Officer Bradford Richmond said.

Darden expects the more frugal behavior to continue "for the balance of the fiscal year, but at a slightly more moderate level," Richmond said on a conference call with analysts.

The quarterly results fell short of internal targets because of weak traffic at Olive Garden and "a search for affordability by our guests across all brands," Andrew Madsen, Darden's chief operating officer, said on the call.

Executives said they were responding by putting more emphasis on value. One heavily advertised Olive Garden special in August offered a never-ending pasta bowl for $8.95.

"These are not deep-discount offers that erode profit margins or brand equity," Madsen said. "We believe this new promotional strategy is a step in the right direction."

That move likely will give a quick boost to closely watched same-restaurant sales, but it is not without risk, Lazard Capital Markets analyst Matthew DiFrisco said in a note.

"Lower-margin items could potentially cannibalize higher margin sales and require incremental staff which may pressure the labor line," DiFrisco said.

At the same time, Darden plans to raise prices 2 percent to 3 percent in the current fiscal year to offset higher costs for food and beverages.

Miller Tabak analyst Stephen Anderson is taking a wait-and-see approach on customer spending, but said Darden has the resources to weather a slow-growth environment.

"They will pick up the customers that others will lose," he said, adding that gains could come at the expense of independents, regional chains and rivals like Ruby Tuesday Inc (RT.N), which is competing more directly with Red Lobster after expanding its seafood menu.

UNAPPETIZING OUTLOOK?

Olive Garden, which has struggled recently, saw sales at restaurants open at least 16 months fall 2.9 percent during the first quarter, ended Aug 28.

Strong performance at Red Lobster and LongHorn Steakhouse offset that drop, and combined same-restaurant sales for the company's "Big Three" brands were up 2.8 percent. Trends improved in August, company executives said.

Olive Garden contributes almost half of Darden's sales, and a higher percentage of operating margin than the company's other brands, Anderson said.

Madsen said Olive Garden will get a new core menu with even more focus on everyday affordability. Advertising for the brand will have greater emotional connections to the "idealized Italian family meal promised by Olive Garden," he said. Darden also plans to remodel Olive Garden restaurants.

"We're making changes at Olive Garden with appropriate urgency ... We have a sound strategy in place to strengthen our business at Olive Garden," Chairman and Chief Executive Clarence Otis said on the conference call.

Orlando, Florida-based Darden reported quarterly earnings of $106.8 million, or 78 cents a share, from continuing operations, in line with Wall Street estimates and the company's results, which it already had announced.

Hurricane Irene hurt sales at established Red Lobster, Olive Garden and LongHorn Steakhouse restaurants, resulting in a roughly 2 cents-per-share profit hit during the quarter.

Sales were up more than 7 percent to $1.94 billion.

Darden, which also owns Bahama Breeze, Seasons 52 and high-end steakhouse Capital Grille, repeated its forecast for full-year growth in earnings per share from continuing operations toward the lower end of a 12 to 15 percent range.

That forecast assumes that cost pressures will ease in the second half of its fiscal year.

Shares of Darden rivals were also lower. Chili's Grill & Bar parent Brinker International Inc (EAT.N) fell 3.4 percent, and Ruby Tuesday dropped 5.8 percent. (Reporting by Lisa Baertlein in Los Angeles and Nivedita Bhattacharjee in Bangalore. Editing by Sayantani Ghosh, John Wallace and Robert MacMillan)

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