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.
Another challenge Darden faces is attempting to balance the needs of different customers, not only those who are mainly motivated by affordability. While less-affluent customers are clamoring for better deals, wealthier customers are demanding more high-end choices on causal dining menus. And they’re willing to pay a premium for them, he said.
As such, Madsen said, it will be important for Darden to try and meet different customer needs and aggressively promote its offerings in the future.
During the second quarter, Darden made major changes to advertising and branding at its three largest concepts: Olive Garden, LongHorn Steakhouse, and Red Lobster. In October, the company introduced a new, overhauled core menu at Red Lobster, which included more items for fewer than $15 and more non-seafood options.
LongHorn Steakhouse also introduced several new menu items during the quarter, including a lobster-stuffed filet and a Cheddar-and-bacon stuffed filet. The brand’s second-quarter advertising campaign used the tagline: “You Can’t Fake Steak.”
Olive Garden introduced a “Dinner Today & Tomorrow” promotion, which gives customers two meals, one to eat in the restaurant and one to take home, for $12.95. The company also added a “lighter fare” section to Olive Garden’s menu.
KeyBanc Capital Markets Inc. analyst Chris O’Cull wrote that each of Darden’s largest brands had issues in promoting these new menus and deals. Cull called Darden’s poor same-store sales “self inflicted.”
One of the problems with LongHorn’s stuffed filet promotion was that it did not communicate a value price point, he wrote. At Olive Garden, O’Cull wrote that the $1 price increase on the “Never Ending Pasta” offer spurred traffic declines. At Red Lobster, he noted that Darden misguidedly extended its “Endless Shrimp” promotion, causing it to run out of steam after 12 weeks.
Madsen said Darden plans to play its promotional and marketing cards close to the chest in the future to avoid tipping off competitors. “We believe we need to be competitively less predictable because we have seen some competitive preemption of our recent promotions,” he said.
However, he said that at Red Lobster, LongHorn and Olive Garden, the company will “more aggressively attack affordability, which means more promotions that are fundamentally about communicating a great deal and less about communicating brand-building news.”
“It also means more price-pointed promotions with shorter duration than we previously planned,” he said.
O’Cull echoed Madsen in his analysis, writing, “In our view, the primary reason SRS underperformed the category…during fiscal 2Q is due to DRI's ineffectiveness in conveying affordability to consumers.”
Darden operates 2,075 company-owned restaurants.