Darden Restaurants Inc. (DRI) , the owner of Olive Garden, LongHorn Steakhouse, and some smaller restaurant chains, said before Friday’s opening bell that its fiscal fourth quarter profits slumped 35 percent as higher costs more than offset slightly increased sales.
In May, Darden agreed to sell its Red Lobster operations to private equity firm Golden Gate Capital for $2.1 billion. The divesture, which activist investor Barington Capital Group is challenging as a “fire sale” and a move that it was unfair to stockholders, was listed in the earnings report as discontinued operations. Another activist investor, Starboard Value LP, is fighting for the replacement of board members at Darden with those capable of implementing a turnaround plan, which could include separating the company’s larger chains from its smaller ones and establishing a new real estate holdings company for its properties.
For the quarter ended May 25, Orlando-based Darden reported total sales from continuing and discontinued operations of $2.32 billion, versus $2.3 billion in the fourth quarter last year. Sales from discontinued operations were listed at $666.2 million, which were down 5.6 percent from Red Lobster sales in the year prior quarter.
Net earnings during the fourth quarter were $86.5 million ($48.4 million from continuing operations, $38.1 million from discontinued operations), compared to $133.2 million in last year’s quarter. This equated to net earnings of 65 cents per share last quarter, compared to $1.01 per share in profits in Q4 last year. On an adjusted basis, which excludes one-time items such as legal expenses, net earnings tallied 84 cents per share.
The profits were well short of Wall Street expectations of earnings of 94 cents per share on sales of $2.32 billion.
Profits were negatively impacted by a 7.1% hike in overall costs and expenses, which including food and beverage costs rising 8.5 percent and restaurant labor costs increasing 2.6 percent.
For all of fiscal 2014, Darden posted revenue of $8.76 billion and earnings of $2.15 per share. This compares with sales of $8.55 billion and EPS of $3.13 in fiscal 2013.
Darden has been struggling to pull customers into Olive Garden, its largest chain with 837 stores, as well as Red Lobster (706 restaurants) as consumers are bombarded with choices of meals at similar or lower prices. As mentioned, sales at Red Lobster locations were down 5.6 percent compared to the year prior quarter. Sales at Olive Gardens were off by 3.5 percent.
If the deal to sell Red Lobster goes through, Darden says it intends to use the net proceeds of approximately $1.6 billion to retire $1.0 billion in outstanding debt and $500 million to $600 million for its freshly launched $700 million stock repurchase plan.
The bright spot for Darden was a 10.8-percent improvement in sales at LongHorn restaurants. Same-store-sales, a measure of sales at stores open more than one year and a key growth metric, increased 2.4 percent. The company’s specialty restaurant group, which includes Bahama Breeze, Yard House, The Capital Grille, Seasons 52 and Eddie Vs, saw a 15.9 percent increase in sales last quarter. Same-store-sales rose for each member of the specialty group, except for a 1.6% slide at Season 52, for an overall increase of 2 percent.
Darden didn’t provide guidance for this quarter or fiscal year in the release, but did say that it intends to maintain its 55-cent quarterly dividend, or $2.20 annually.
Shares of DRI opened lower by just over 4 percent at $47.53.