Darden warns on quarter and year; stock plummets

By Brad Dorfman

CHICAGO (Reuters) - Darden Restaurants Inc (DRI.N) warned investors that its quarterly profit will come in well below Wall Street estimates and cut its forecast for the full year on Tuesday, sending its shares down 15 percent.

Traffic at the company's chains -- which include Red Lobster, Olive Garden and LongHorn Steakhouse -- was worse than expected, a spokesman for the company said.

"People were not in the restaurants in the volume we were anticipating," said Darden spokesman Rich Jeffers.

Casual dining restaurants -- the moderately priced, sit-down chains run by Darden and rivals like Brinker International Inc (EAT.N) and DineEquity Inc (DIN.N) -- have been hammered by the weak U.S. economy and soaring gasoline prices.

Jeffers could not say if traffic got worse in the last two weeks of the quarter, when consumers may have been watching the Olympics instead of going out to restaurants as some analysts have proposed.

"For a large part of that period, gas prices were extraordinarily high," John Owens, analyst at Morningstar, said. "It was a challenging consumer environment and it's possible that consumers at the tail end of the quarter were watching Phelps instead of going out," he added, referring to gold-medal winning U.S. Olympic swimmer Michael Phelps.

Aside from Darden, which was on track for its largest one-day percentage drop since September, Brinker shares were down 4 percent, DineEquity shares were down 4.5 percent and Ruby Tuesday Inc (RT.N) shares were down 4.7 percent.

AN OLYMPIC DEFEAT?

Morgan Keegan analyst Robert Derrington said in a research note last week that strong viewership for the Olympics could add to the woes of the casual dining sector, whose July results are estimated to be some of the weakest in the past decade.

Darden said it expects earnings per share to be 60 cents to 62 cents a share in the first quarter ended Sunday, excluding costs related to its acquisition last year of Rare Hospitality International.

Analysts on average had forecast 75 cents a share, according to Reuters Estimates.

Sales at restaurants open at least 16 months are expected to be down 1.1 percent, led by a 4.9 percent drop at LongHorn Steakhouse and a 3.7 percent drop at Red Lobster.

Same-restaurant sales at Olive Garden rose 2.4 percent, according to preliminary figures, the company said.

For all of fiscal year 2009, the company now expects same-restaurant sales to be flat to up 1 percent on a combined basis, not up 2 percent as it forecast two months ago.

The company also forecast a 5 percent to 10 percent earnings per share increase for the year, including costs related to the Rare acquisition, compared with the 14 percent to 15 percent increase it forecast in June.

Excluding one-time items, it expects earnings to be flat to up 5 percent from the $2.74 it posted in fiscal year 2008, down from a previous forecast calling for a 9 percent to 10 percent increase.

Darden shares fell $4.88 to $27.38 on the New York Stock Exchange.

Trading at about 10 times estimated earnings for the current fiscal year, Darden already had the second-lowest multiple in the Dow Jones U.S. Restaurant and Bars index .DJUSRU.

Owens, whose earnings estimates were already lower than company expectations, said the stock could still be attractively priced, despite the warning.

(Additional reporting by Lisa Baertlein, editing by Dave Zimmerman)