DRI – Then and Now

Darden preannounced its 1Q09 results earlier today and significantly lowered its full-year outlook. Although back in June on its 4Q08 earnings call, Darden management highlighted the challenging environment as a reason to be cautious, citing higher costs and the expectation for traffic and mix changes to be flat to slightly negative in FY09, based on the magnitude of change in the company’s full-year outlook from then to now, management was not cautious enough.

Most surprising, relative to the company’s preliminary 1Q09 results, was the 2.4% same-store sales growth at Olive Garden, down from the 5.8% number in 4Q08. Olive Garden was facing a tough comparison in 1Q09 from last year when comparable sales grew 4.8%, but the 2-year average also declined sequentially by 1.1%, proving that Olive Garden is not immune to the issues facing the casual dining segment as it had appeared for some time. The more troubling component of the same-store sales result is the drop off in traffic. If you assume price was running up about 3%-4% in 1Q09, traffic fell from up over 3.0% in 4Q08 to negative in 1Q09.

What has changed since DRI’s June 25th 4Q08 conference call?

June 25th: “We are pleased with Olive Garden's strength in this challenging consumer environment and we believe they will continue to deliver industry leading performance during this fiscal year.”

“In fiscal 2009, we expect combined same-restaurant sales growth for Red Lobster, Olive Garden, and LongHorn Steakhouse to be approximately 2%. This includes approximately 2% to 3% of pricing for fiscal 2009 and our expectation that together, traffic and mix changes will be flat to slightly negative.”

Today: "With a more challenging than anticipated economic and consumer environment this quarter, our initial expectations for our same-restaurant sales performance proved optimistic. Our revised earnings outlook for the full year reflects expected first quarter results as well as our expectation that same-restaurant sales will remain under pressure for the balance of the fiscal year." DRI announced that it now expects combined full-year U.S. same-restaurant sales growth in fiscal 2009 of approximately 0% to 1% for Red Lobster, Olive Garden and LongHorn Steakhouse.

June 25th: Excluding the impact of integration costs and adjustments for both fiscal 2008 and fiscal 2009, the company expects EPS growth of 9% to 10% on a 53-week basis and 7% to 8% on a 52-week basis.

Today: Excluding the impact of integration costs and adjustments for both fiscal 2008 and fiscal 2009, the company expects EPS growth to be between 0% and 5% on a 53-week basis and -2% and +3% on a 52-week basis.

What has remained the same?

June 25th: “Looking ahead to fiscal 2009, the strategic priority at Olive Garden remains unchanged, and that is to accelerate new restaurant growth while maintaining same-restaurant excellence. Olive Garden expects to open approximately 40 net new restaurants during fiscal 2009 and ultimately, as we have said before, we believe that the brand has the potential to operated 800 to 900 restaurants in North America.”

“Looking ahead to unit growth, new restaurant plans that Drew and Gene outlined mean that we expect a net new restaurant increase of approximately 75 to 80 restaurants or about 4% to 5%.”

Today: DRI expects to open approximately 75 to 80 net new restaurants in fiscal 2009.

As I said earlier, today’s announcement proves that DRI and the Olive Garden are not immune to the challenges facing restaurant operators today. That being said, DRI needs to re-evaluate its new unit growth targets in light of today’s environment. If the Olive Garden cannot maintain “same-restaurant excellence,” then management should not continue to accelerate new restaurant growth.
Darden’s Olive Garden experienced a significant slowdown in same-store sales trends in 1Q09.

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