Olive Garden, Red Lobster owner cuts profit outlook, citing failed promotions

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ORLANDO, Fla. - Darden Restaurants Inc. is cutting its profit forecast for the year, with the owner of the Olive Garden and Red Lobster restaurant chains, blaming failed promotions and negative publicity about its tests to limit worker health costs.

Darden's stock tumbled eight per cent.

Orlando, Fla.-based Darden said it expects a profit from continuing operations of 25 cents or 26 cents per share for its second quarter, which ended Nov. 25.

The company said it expects costs related to its acquisition of the Yard House USA Inc. chain to reduce profit from continuing operations by about 5 cents per share and costs related to Superstorm Sandy to reduce it by about 1 cent.

Analysts polled by FactSet had expected earnings of 46 cents per share.

Darden also said that it expects combined U.S. same-restaurant revenue for the quarter to be down about 2.7 per cent at its Red Lobster, Olive Garden and LongHorn Steakhouse chains, but increase about 0.7 per cent at its specialty restaurant group. The metric is a key measure of a restaurant's health, because it excludes revenue at restaurants that recently opened or closed.

The company has some locations in Canada, mainly Red Lobster seafood restaurants.

Darden also said bad publicity from its statements on health care could hurt it. In October, the company had said it was putting more workers on part-time status in a test aimed at limiting costs from President Barack Obama's health care law.

Under the new law, companies with 50 or more workers could be hit with fines if they do not provide basic coverage for full-time workers and their dependents. Those penalties and requirements could significantly boost labour costs for some companies, particularly in low-wage industries such as retail and hospitality, where most jobs don't come with health benefits.

The company plans to release its final fiscal second-quarter sales and earnings results before the markets open on Dec. 20.

Darden Chairman and CEO Clarence Otis said the company's promotions didn't resonate with "financially stretched" diners and show the need for bold changes in its promotional approach at its three major brands. As a result, Darden is revising its promotional calendars at those chains for the rest of the year to better fit with the financial realities and expectations of diners, he said.

As a result of the upcoming changes, Otis said the company is being cautious about its outlook for the full fiscal year. The company projected a fiscal 2013 profit from continuing operations of $3.29 to $3.49 per share, which includes about 8 cents to 10 cents of transaction and closing costs related to the Yard House acquisition.

The company's previous guidance was for earnings of $3.76 to $3.90 per share. Analysts had expected $3.87 per share.

That guidance is based on expectations of total sales growth of between 7.5 per cent and 8.5 per cent, boosted by contributions from about 100 new restaurants, not including the initial 40 Yard House restaurants operating at the close of the acquisition.

The company previously projected a revenue increase of 9 per cent to 10 per cent.

Same-restaurant revenue at Red Lobster, Olive Garden and LongHorn Steakhouse restaurants is expected to be flat to down 1 per cent.

Based on the company's fiscal 2012 revenue of $8 billion, the new guidance projects fiscal 2013 revenue of $8.6 billion to $8.68 billion. Analysts had expected $8.75 billion.

Darden shares fell $4.42, or 8 per cent, to $48 in heavy morning trading, after dropping as low as $47.50 shortly after the markets opened. Over the past 52 weeks, the company's shares have traded between $41.65 and $57.93.

Organizations: Red Lobster, Yard House USA, Darden Restaurants Inc. FactSet

Geographic location: ORLANDO, U.S., Canada

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