Red Lobster owner Darden Restaurants cuts outlook

ORLANDO, Fla. Darden Restaurants (DRI), struggling to draw more customers into its Olive Garden and Red Lobster restaurants, predicted a third-quarter profit Friday that was below Wall Street's expectations and cut its outlook for the year.

The Orlando, Fla.-based chain has tried to revamp menus and marketing for its flagship chains. But revenue at Olive Garden, Red Lobster and LongHorn Steakhouse locations open at least one year is expected to fall 4.5 percent in the quarter ending Feb. 24, indicating those efforts have yet to pay off.

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"We recognize there is still more to do to further address affordability and to improve other important aspects of the guest experiences we provide," said CEO Clarence Otis in a statement, adding that re-establishing growth at the three chains was Darden's top priority.

Otis said the first half of the fiscal third quarter was "encouraging," but higher payroll taxes and rising gas prices, along with severe winter weather, sent sales sliding in February.

Darden isn't the only company saying the higher payroll tax has cut into its business. On Thursday Wal-Mart Stores (WMT) said higher taxes, along with rising gas prices and delayed income tax refunds, were also crimping spending by its customers.

On Jan. 1, Social Security payroll taxes rose 2 percentage points after a temporary tax cut expired. That sliced about $1,000 from the annual take-home pay of a household earning $50,000.

But Darden has longer-running problems. Like other casual sit-down restaurant companies, it's been dealing with tougher competition due to the growing popularity of chains such as Chipotle Mexican Grill (CMG) and Panera Bread (PNRA). They offer food that's a step up from fast food but not as expensive as a sit-down restaurant.

To combat this, at Olive Garden, the company rolled out an updated advertising campaign and introduced more light and affordable dishes. At Red Lobster, it added options for people who don't like seafood.

But so far these changes have not sparked a turnaround. In January Darden replaced the president of Olive Garden in an effort to improve results.

Darden Restaurants Inc. said net income from continuing operations in December-February period will be $1 to $1.02 per share, below analyst expectations of $1.12 per share, according to FactSet.

That's based on revenue in restaurants open at least one year, a key retail metric, dropping 4 percent at Olive Garden, 7 percent at Red Lobster and 1.5 percent at LongHorn Steakhouse. For its division of smaller restaurant chains, it expects the measure to rise 2 percent.

For the fiscal year ending in May, Darden predicted revenue in restaurants open at least one year to rise 6 to 7 percent across its chains, with a drop of 1.5 to 2.5 percent for the division containing the Red Lobster, Olive Garden and LongHorn Steakhouse chains.

The company cut its outlook for 2013 earnings from continuing operations to $3.06 to $3.22 per share, from a December prediction of $3.29 to $3.49 per share. Analysts expected $3.38 per share.

The forecast includes costs of 9 cents per share related to acquiring the Yard House restaurant chain.

Darden plans to announce third-quarter results March 22.

Shares rose despite the weak outlook, however, after an upgrade from a Janney analyst. He said the company's problems are already reflected in the stock's value. Shares had dropped 12 percent over the past 52 weeks.

The stock added $1, or 2.2 percent, to $45.74 in late morning trading. That's still close to the low end of its 52-week trading range of $44.11 to $57.93.

"We believe a lot of the bad news about Darden is already in the stock," Janney's Mark Kalinowski said, particularly with Friday's outlook. "Today's news looks to us like a classic `buy on bad news' opportunity."

He upgraded the stock to "Buy" from "Hold."