Darden Restaurants Inc. reported same-store sales increases across all of its major brands during the fourth quarter of 2013 — a bright spot in an otherwise gloomy year for the Orlando, Fla.-based company.
“I think many of you know that we moved with added urgency to address the same-restaurant traffic erosion we've been experiencing since the recession started,” said chief executive Clarence Otis during an earnings call with analysts. “But in the fourth quarter of fiscal 2013, our same-restaurant traffic decline exceeded the industry's.”
The company’s fiscal 2013 fourth quarter and full year ended May 26.
During fiscal 2013, Darden shifted its focus toward value-conscious consumers at its three largest brands: Olive Garden, LongHorn Steakhouse and Red Lobster, Otis said. But that shift toward affordability wasn’t without its challenges.
“As we look back, we also know that many of our promotional core menu affordability efforts involve more margin pressure than initially anticipated,” he said.
The last year had its host of challenges with staffing, too, Otis said, including adding new leadership roles that required “new skill sets and professional experience.”
“Now as we look back, the cost of the leadership changes we made was much higher than we expected,” he said. “And the most significant but difficult-to-measure cost was that associated with reduced executional effectiveness.”
Darden’s net income during the fourth quarter was $133.2 million, or $1.01 earnings per share, a decrease from $151.2 million, or $1.15 per share the prior year. Revenue for the quarter was nearly 2.3 billion, an increase from just shy of $2.1 billion the prior year quarter.
Net income for the full year was $411.9 million, or $3.13 per share, falling from $475.5 million, or $3.57 per share, the previous year. Revenue for the full year was slightly more than $8.5 billion, rising from nearly $8 billion in fiscal 2012.
This year, Darden’s reported net income included costs and adjustments related to the Aug. 29 acquisition of Yard House, the company said in a statement. The acquisition reduced net earnings per share for the quarter by one cent, Darden said, and net earnings by $1.9 million.
Same-store sales swing positive
Olive Garden, Darden’s largest brand, reported total sales of $952 million and a same-store sales increase of 1.1 percent during the quarter. For the full year, the brand reported total sales of $3.68 billion, and a same-store sales decrease of 1.1 percent.
At Red Lobster, U.S. same-store sales rose 3.2 percent during the fourth quarter, with sales totaling $703 million. For the full year, the brand reported a same-store sales decrease of 2.2 percent at U.S. locations. Red Lobster reported total sales of $2.62 billion for the full year.
LongHorn Steakhouse reported a same-store sales increase of 3.5 percent during the fourth quarter at U.S. locations, reporting total sales of $339 million for the period. Annually, the steakhouse chain reported total sales of $1.23 billion — a 10.3-percent year-over-year increase — and a same-store sales increase of 1.2 percent.
Next year, Darden will continue to differentiate LongHorn from other steakhouse competitors by adding more fine-dining elements like seasonal appetizers and add-ons, said Andrew Madsen, chief operating officer and president at Darden.
“We plan…to elevate culinary innovation with approachable new dishes inspired by fine-dining and polished-casual restaurants,” he said.
At Darden’s specialty restaurant group, which performed strongly throughout 2013, same-store sales rose 4.5 percent for the fourth quarter. The group reported $295 million in revenue for the quarter and $986 million in revenue for the year.
The specialty restaurant group is composed of Seasons 52, Yard House, Eddie V’s, The Capital Grille and Bahama Breeze.
Driving traffic top priority
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In 2014, boosting in-restaurant traffic will be the priority for Darden, even if that means taking a hit on margins, Otis said.
“We believe that same-restaurant traffic growth is critical,” Otis said. “That, ultimately, is the best measure of brand health…to the extent that that puts pressure on restaurant-level margins, that’s pressure we’re willing to accept.”
In 2014, same-store sales should be flat to an increase of 2 percent at LongHorn Steakhouse, Olive Garden and Red Lobster, said Brad Richmond, Darden’s chief financial officer. Same-restaurant traffic at the three brands should be flat to a 1-percent increase for the year, he said.
Total sales growth for 2014 is expected to be between 6 percent and 8 percent, he said.
Stephen Anderson, senior analyst, restaurants, at Miller Tabak + Co. wrote in a report that although Darden missed Wall Street’s expectations for earnings during the fourth quarter, top-line trends are encouraging.
“We acknowledge continued margin pressure as management adjusts to changes in menu mix and higher management compensation expenses, but argue investors should focus more on positive comps at nearly every concept last quarter, marking the first time this has happened in five quarters [and] sequential improvement at DRI’s largest concept, Olive Garden, in each month of the May quarter,” he wrote.
“DRI posted its best overall same-restaurant sales quarter since early 2012,” Anderson added.
Darden has more than 2,100 company-owned restaurants systemwide, including 828 Olive Garden locations, 430 LongHorn Steakhouses and 705 Red Lobster restaurants.