Darden's Weak Sales Weigh On Other Dining Chains

Darden Restaurants Inc. (DRI) shares sank on a disappointing sales outlook and weighed down other casual dining stocks as it pushed hopes of a recovery further down the road.

Darden shares were off $3.33, or 9.2%, in early trading, falling to $32.82. Other decliners include Brinker International Inc. (EAT), down 4.8% to $15.11, DineEquity Inc. (DIN), down 5.1% to $24.46, and Cheesecake Factory Inc. (CAKE), down 5.4% to $18.55.

Darden, which operates Olive Garden, Red Lobster and other brands, relied on falling food and energy prices, and other cost cutting efforts to narrowly top analyst estimates when it reported a 15% rise in fiscal first-quarter earnings Tuesday, but investors are craving signs of improving sales.

Darden disappointed in that respect, reporting same-store sales declining 5.3% at Olive Garden, Red Lobster and Longhorn Steakhouse, its three major brands, more than expected and the company said same-store sales could fall as much as 3% for the fiscal year, one percentage point worst than expected.

Most restaurants are close to lapping most of the cost cuts that they made in the last year, as they cut back the number of hours employees work and tried to better manage food waste. To grow earnings, sales will have to make a comeback, but unemployment woes continue to weigh on the consumer. Darden executives expect September sales to remain similar to August at its three main brands, similar to the broader industry.

"As long as there's meaningful job loss, it's going to be a drag on consumer sentiment," Darden's Chief Financial Officer Brad Richmond said on Wednesday's earnings call.

The casual-dining industry has also grown increasingly promotional, cutting prices and offering deals to bring back customers. Darden tried to stay out of that fray, limited its main promotions to the Olive Garden brand in the latest quarter.

Executives said they would try more traffic-driving promotions at Red Lobster and Longhorn in other quarters when its most appropriate, but the company is not going to low-ball competitors offers, as those customers are unprofitable.

"Some of the traffic that's available is not worth having in the stores," Chairman and Chief Executive Clarence Otis said.

The chain reiterated full-year earnings guidance, but said it was more likely to be in the low end of the range.

Analysts still largely consider Darden the marquee stock among casual-dining names, with their differentiated brands that allow them to avoid discounts to stand out. Sales also continue to outperform the casual-dining industry as Darden brands pick up market share.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; [e-mail]