Darden Falls on Food Inflation Forecast

ORLANDO ( TheStreet) -- Darden Restaurants ( DRI) beat fiscal third-quarter profit expectations but said that in still needs to offer promotions to draw in diners.

Darden, the operator of Red Lobster, Olive Garden and Longhorn Steakhouse restaurants, also reiterated its outlook for food cost inflation between 3.5% to 4% in fiscal 2012.

The company also warned that the U.S. restaurant industry remains under pressure as the economy works to recover, meaning diners remain reluctant to go out and spend money at restaurants without promotions and deals to entice them.

Those cautionary statements led investors to bid Darden shares 2.6% lower to $46.78 Friday morning despite its earnings beat.

Fewer-than-expected diners visited Olive Garden restaurants open at least 14 months last quarter as some of its promotions did not have the strong pull on diners Darden had hoped for. Olive Garden sales account for nearly half of the company's net revenue.

"The environment, while improving, remains more fragile than normal and it's very much driven by promotional effectiveness," CFO Brad Richmond told analysts on a conference call.

Combined comparable same-store sales -- or sales at stores open at least one year, a closely watched metric in the restaurant industry -- at all three of Darden's restaurant concepts rose 0.9%, led by a 12.6% sales jump at LongHorn, 4.3% at Olive Garden and 1.2% at Red Lobster.

Darden reiterated its forecast for comps growth between 1.5% and 2% for the current fiscal year, ending in May.

"We believe remodeling programs, especially at LongHorn Steakhouse, new menu offerings, cost saving initiatives and continued innovation around promotional efforts led to the earnings per share growth," noted analysts from Zacks Investment Research. "However, increasing food costs specially beef, underperformance at its core brands, Olive Garden and Red Lobster, in terms of same-restaurant traffic and stiff competition from the peers like Brinker International ( EAT) and Red Robin Gourmet Burgers ( RRGB) will drag its profits."

Looking ahead, Darden raised its 2011 earnings-per-share growth forecast to 19%, up from its prior estimate for growth between 17% and 18%. That outlook is based on sales growth expectations of 5.5%, comps growth up to 2% and 70 to 75 net new restaurants openings during the year.

In the recent quarter, Darden earned $1.08 per share, up from 95 cents in the year-earlier period, beating estimates by 3 cents per share.

Total revenue jumped 5.5% to $1.98 million, also topping expectations.

-- Written by Miriam Marcus Reimer in New York.

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