January 31, 2011 / 4:43 PM / in 7 years

Darden sees more predictable costs

LOS ANGELES (Reuters) - Darden Restaurants Inc (DRI.N) raised its fiscal-year profit forecast and said it expected more predictable costs, helping to ease concerns about the threat of rising ingredient prices for the sector.

Shares of the owner of the Olive Garden, Red Lobster and LongHorn Steakhouse chains gained 4.3 percent ahead of an analyst and investor conference scheduled for Monday afternoon and Tuesday morning.

Darden, regarded as one of the best-run U.S. restaurant businesses, on Tuesday will lay out its strategy for containing commodity cost increases, which are squeezing restaurant operators around the world.

KeyBanc Capital Markets analyst Brad Ludington told Reuters that Darden’s bare-bones statements about more predictable costs “gave a lot of relief” to investors.

Already this month, restaurant companies like McDonald’s Corp (MCD.N) and Starbucks Corp (SBUX.O) eased investors’ fears about rising expenses with plans to raise prices and lock in commodity costs with contracts through the year.

Darden’s ability to better estimate costs mitigated damage to sales and profits from snowstorms that recently have battered several regions of the United States, Chief Executive Officer Clarence Otis said in a brief statement on Monday.

“We’re better-positioned than our competition to respond to important business dynamics” including cost volatility, growth opportunities and new government mandates, Otis said on a webcast from the investor meeting.

Darden’s rivals include Brinker International (EAT.N), parent of the Chili’s Grill & Bar chain, Ruby Tuesday Inc RT.N, DineEquity Inc’s (DIN.N) Applebee‘s, as well as newer chains like Buffalo Wild Wings Inc. BWLD.O

The Orlando, Florida-based company, which said it is stealing market share from other chains, forecast earnings from continuing operations of $1.04 to $1.06 per share in the third quarter ending on February 27, even as severe winter weather hurt sales. The analysts’ average forecast is $1.01, according to Thomson Reuters I/B/E/S.

For the full year, Darden now expects earnings per share from continuing operations to rise 17 percent to 18 percent from $2.86 in fiscal 2010. The company previously forecast growth of 14 percent to 17 percent.

The company’s new full-year profit forecast translate to a range of $3.35 to $3.37 per share, analysts said.

Analysts on average had expected a full-year profit of $3.34 per share, an increase of 16.8 percent from fiscal 2010.

Ludington said in a client note that he was “encouraged” by the increased profit forecasts, even after inclement winter weather put a chill on same-restaurant sales at its “Big Three” brands -- Olive Garden, Red Lobster and LongHorn Steakhouse.


Darden, which also owns the upscale Capital Grille steak house chain, is a bellwether for the casual dining industry. Investors are likely to pay close attention to its comments about the broader category and its own plans for addressing rising food bills.

In December, Darden said it expected commodity costs to rise 1 to 1.5 percent in the second half of its fiscal year.

    At that time, it said it would take steps to lock in prices for a bigger portion of its beef purchases. Beef accounts for about 14 percent of Darden’s food costs, and in December the company had about a quarter of its beef purchases contracted -- less than any other major commodity.

    Last week, McDonald‘s, the world’s largest hamburger chain, said it would hike prices “where it makes sense” to cover some, but not all, of its expected food cost increases.

    Starbucks, the world’s biggest cafe chain, warned that coffee costs would cut full-year earnings per share by 20 cents -- at least double its prior estimate -- but that it had purchased all of its coffee for this year and a few months of 2012.


    Darden said the severe winter weather had reduced third-quarter same-restaurant sales by 0.8 percentage points.

    It forecast a 1 percent rise in sales at Olive Garden, LongHorn Steakhouse and Red Lobster restaurants open at least 16 months.

    By brand, the company expects same-restaurant sales to be up 1.5 percent at Olive Garden in the third quarter and up 4.5 percent at LongHorn Steakhouse, but down 1 percent at Red Lobster, which has struggled with declining sales in recent quarters.

    Analyst Ludington said the targets for same-restaurant sales fell short of his own estimates, mostly because of the severe winter weather.

    Darden shares closed up $1.93 or 4.3 percent to $47.11 on the New York Stock Exchange. Brinker finished up 0.1 percent, Ruby Tuesday gained 2 percent, DineEquity added 2.1 percent and Buffalo Wild Wings fell 0.3 percent.

    Additional reporting by Phil Wahba in New York; editing by John Wallace, Lisa Von Ahn and Matthew Lewis

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