Darden to retool marketing after 2Q sales miss

Darden Restaurants, Inc. reported lackluster second-quarter earnings on Thursday, which the company said were the result of fruitless promotions at its three largest brands and the media’s coverage of the company’s healthcare analysis targeting full-time employees.

Orlando-based Darden reported $1.96 billion in revenue for the second quarter ended November 25, a 0.7-percent increase year over year. Net earnings for the quarter fell short at $33.6 million, or 26 cents per share, from $53.7 million, or 40 cents per share the prior year.

U.S. same-store sales fell 3.2 percent at Olive Garden, dropped 2.7 percent at Red Lobster and fell 0.8 percent at LongHorn Steakhouse. Darden’s Specialty Restaurant Group, which includes higher-end casual dining restaurants The Capital Grille and Seasons 52, saw same-store sales increase 0.8 percent.

On Dec. 4, Darden warned that its second-quarter earnings would be lower than expected. Thursday’s report was in line with the company’s diminished expectations.

At the time, Darden Chief Executive Clarence Otis Jr. said in a statement: “Our second quarter is an especially value-sensitive time of year, and this year’s promotional offers were largely consistent in nature with what we’ve promoted successfully in the past. These promotions did not resonate with financially stretched consumers.”

Facing health care-related backlash

Starting in February, Darden began analyzing the financial impact of limiting employee hours, moving some full-time employees to part-time status as a way to potentially mitigate health care costs. Per the Patient Protection and Affordable Care Act, companies must offer insurance to employees working 30 hours per week or more.

“The volume of coverage and conversation about this was significant,” Otis said. “And although it's difficult to measure, we do think it had an adverse impact on our results.

After the healthcare analysis was complete, the company ultimately decided not to move any full-time employees to part-time status. Otis added that it is unclear what impact the healthcare-focused media coverage will have on Darden’s guests and employees in the future.

Andrew H. Madsen, the company’s president and chief operating officer, said that continuing difficulties in the casual-dining segment also impacted sales for the quarter.

“What we will continue to see in casual dining is a highly competitive market-share contest,” he said. For customers, he added, the primary issue is affordability. Customers have shown increased interest in dining out, however, they often feel they can’t afford to do so, he added.

Madsen said Darden has not responded aggressively enough to its guests’ need for affordable options. He noted that one specific change during the quarter — raising the price of Olive Garden’s “Never Ending Pasta Bowl” from $8.95 to $9.95 — resulted in a decrease in traffic that was bigger than anticipated.