Darden dealing with difficulties

by Eric Schroeder
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ORLANDO, FLA. — A number of changes are in store for Darden Restaurants, Inc. after the operator of Olive Garden, Red Lobster and LongHorn Steakhouse posted sharply lower profit in the first quarter of fiscal 2014.

Citing “appreciably greater sales volatility” in the restaurant industry, Clarence Otis, chairman and chief executive officer of Darden, announced during a Sept. 20 conference call with analysts that the company will be slashing costs, including reducing its workforce. Mr. Otis also said Drew Madsen, the company’s president and chief operating officer, will retire at the end of the second quarter and has been replaced by Gene Lee, effective immediately.

“We’ve taken steps that will reduce our operating support spending by $50 million a year on an ongoing basis, beginning next year, our fiscal 2015,” Mr. Otis said. “For this year, fiscal 2014, the reduction will be approximately $25 million. And that will be offset by approximately $10 million of upfront costs to implement the plan. The plan does involve the elimination of a meaningful number of support positions, about 85.”

Mr. Otis declined to elaborate on the position cuts, but he said the actions should provide Darden with the financial flexibility in the face of heightened volatility to do two things to regain operating momentum: Invest in providing affordability to those guests who need more affordability, and invest in refining offers in ways that are responsive to guests who are more focused on other attributes of their dining experiences.

Specifically, the company will try to rediscover lost traffic at Olive Garden and Red Lobster.

Year-over-year first-quarter sales at Olive Garden slipped 0.4% to $918 million, due in large part to a 4% decline in same-restaurant sales. Mr. Madsen said Olive Garden’s biggest challenge during the quarter was guest counts, which suffered because of weaker overall industry conditions, and a July promotion that did not perform as well as expected.

“We exceeded our estimate for industry guest counts during June when we advertised three-course Italian dinner for $12.95,” he said. “But we trailed our industry estimate during July when we advertised two Italian dinners for $25, which we believe was primarily the result of this promotion not having enough news to wrap on its successful debut at the same time last year. And then we exceeded the industry again during August behind Never Ending Pasta Bowl.”

Mr. Madsen said the company continues to evolve “the Olive Garden experience” so that it responds to what guests want beyond affordability. During the first quarter, this effort included the introduction of a new small plates platform called Tastes of Italy. The company plans to expand the small plate section in the near future. Darden also will scale back on new restaurant openings. After opening 36 Olive Garden restaurants in fiscal 2013, the company plans to open only 15 in fiscal 2014.

“(This) will allow our restaurant and leadership teams more time to focus on existing guests, while building a stronger foundation for pursuing new guests and new occasions,” Mr. Madsen said.

First-quarter sales at Red Lobster totaled $624 million, down 5.5% from the same period a year ago as U.S. same-restaurant sales fell 5.2%. Mr. Madsen said two promotions — Seaside Mix & Match and Four Course Seafood Feast — did not perform up to expectations during June and July. Performance was better in August as the company bumped its endless shrimp promotion back to its historical price point of $15.99, he added.

Meanwhile, Darden will look for continued success at LongHorn Steakhouse, where first-quarter sales increased 14% to $325 million, driven by 47 net new restaurants and a U.S. same-restaurant sales increase of 3.2%. Mr. Madsen said the restaurant executed effectively against its three strategic priorities: delivering superior customer service, improving affordability, and evolving the brand experience.

As Darden moves forward it will lean on a new president and c.o.o. in Mr. Lee, who joined Darden in 2007 following the company’s acquisition of RARE Hospitality, where he had been president and c.o.o. since 2001. Mr. Lee most recently was president of Darden’s Specialty Restaurant Group.

“With nearly 30 years in the restaurant industry, Gene has extraordinary knowledge of our full range of guests,” Mr. Otis said. “He is clearly the right leader to reinforce our focus on ensuring that the in-restaurant experiences we provide are evolving appropriately in response to consumers’ changing needs and desires.”

Net income at Darden in the first quarter ended Aug. 25 was $70.2 million, equal to 54c per share on the common stock, down 37% from $110.8 million, or 87c per share, in the same period a year ago. Sales were $2,158.5 million, up 6% from $2,034.8 million.
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