Darden Restaurants Inc (DRI.N) reported a steep fall-off in business at its Olive Garden, Red Lobster and LongHorn Steakhouse chains on Tuesday and lowered financial expectations for the year, sending shares down 10 percent.
The company said it would revamp promotions in a bid to attract more customers, but Chief Executive Officer Clarence Otis said he remained cautious about forecasts given recent results and planned changes.
The warning from Darden, which until recently had been one of the restaurant industry's top performers, comes as industry leader McDonald's Corp (MCD.N) also has seen its U.S. results falter amid a resurgence of formerly weak competitors.
Darden's second-quarter miss and tempered full-year forecasts reflect both a challenging demand environment and continued - and likely worsening - share losses, Bernstein Research analyst Sara Senatore said.
"It looks like Darden is even weaker than the industry," she said, noting that demand for meals at full-service restaurants such as those Darden operates has deteriorated.
Darden's promotions did not "resonate with financially stretched consumers as well as newer promotions from competitors", Otis said in a statement.
"Our disappointing results for the quarter point to the need for bolder changes in the promotional approach at our three large brands," he said, adding the company would be "retooling" such offers for the balance of the year.
Darden has struggled to find the right recipe for its Olive Garden chain, which generates almost half of overall revenue. The company was slow to adopt the promotions and other deals that rivals such as DineEquity Inc's (DIN.N) Applebee's and Brinker International Inc's (EAT.N) Chili's Grill & Bar embraced.
Other rivals include the Cheesecake Factory Inc (CAKE.O) and Bloomin' Brands Inc (BLMN.O), whose chains include Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill and Fleming's steakhouse.
Darden shares fell $5.66, or 10.7 percent, to $46.76 on the New York Stock Exchange.
Shares in the company's rivals fell as well. Stock in Cheesecake Factory was down 5 percent, Bloomin' Brands lost 4 percent, Brinker slipped 3 percent and DineEquity was off a bit more than 1 percent.
Darden now expects net earnings from continuing operations of 25 cents to 26 cents per share for the second quarter ended November 25. That includes a reduction of 5 cents per share related to its purchase of Yard House USA Inc and a hit of 1 cent per share from Hurricane Sandy.
Some analysts said that was significantly below Wall Street's average estimate of 46 cents per share. A spokesman for Darden said analysts were expecting a net profit of 42 cents per share for the quarter.
Darden expects same-restaurant sales to be down 3.2 percent at Olive Garden, off 2.7 percent at Red Lobster and down 0.8 percent at LongHorn Steakhouse for the quarter. It anticipates that combined sales at those chains will fall about 2.7 percent, versus the nearly 1 percent increase some analysts expected.
Based on the recent results and planned changes to Darden's promotions, "we are being cautious about our sales and earnings forecast for the full year", CEO Otis said.
The company lowered its full-year target for combined same-store sales at Olive Garden, Red Lobster and LongHorn Steakhouse. It now expects those combined sales to be flat to down 1 percent, compared with its prior call for a rise of 1 to 2 percent.
Darden set its forecast for fiscal 2013 net earnings per share from continuing operations at $3.29 to $3.49. That includes 8 cents to 10 cents in charges related to the Yard House purchase.
The company said its full-year targets also reflected the potential impact of recent negative media coverage about its moving some workers to part-time from full-time schedules in an effort to hold down the cost of federal healthcare reforms.
In September, Darden said it expected fiscal 2013 net earnings per share growth from continuing operations of 5 percent to 9 percent, including acquisition-related costs and purchase accounting adjustments of about 7 to 10 cents per share. That growth would have been off its fiscal 2012 earnings of $3.58 per share.
Darden is scheduled to release final second-quarter results on December 20.
(Reporting by Lisa Baertlein in Los Angeles; Editing by Dale Hudson and Leslie Gevirtz)