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Darden profit rises ahead of Olive Garden revamp

Friday - 9/21/2012, 6:06pm  ET

By CANDICE CHOI and MICHELLE CHAPMAN
Associated Press

NEW YORK (AP) - Darden Restaurants Inc. on Friday reported a better-than-expected profit for its fiscal first quarter as it prepared to revamp the menus for its struggling Olive Garden and Red Lobster chains.

The company also declared a quarterly dividend, sending shares up more than 5 percent and briefly touching an all-time high.

At Olive Garden, the company's biggest chain, Darden has been trying to boost traffic by focusing on value and adding lighter options to the menu. Drew Madsen, the company's chief operating officer, said the desire for smaller portion sizes is reflected in the growing number of customers who are ordering an appetizer as a meal.

"Generous appetizers can substitute for entrees and small plates _ those are opportunities we will address with our menu enhancements," Madsen said, noting that major changes are planned for the year ahead.

The trend of ordering smaller dishes may also reflect customer sensitivity to prices in the tough economic climate. As such, Olive Garden plans to keep price hikes to below 2 percent for the year ahead.

Olive Garden's attention to prices is also being forced by competitors such as Applebee's, which is known for its "2 for $20" deal.

Toward the end of the quarter, however, Olive Garden raised the price of its popular "Never Ending Pasta" promotion for the first time in five years to $9.95, up $1. That was needed to make up for increased costs over that time, the company said.

Although Darden has already started retooling its menu and marketing, traffic at established Olive Garden restaurants declined during the period. The company blamed the dip in part on its "Taste of Tuscany" promotion, which failed to resonate at the start of the quarter. Traffic was also impacted because it does not include customers who order appetizers as entrees. Higher prices offset the decline and sales at restaurants open at least a year edged up 0.3 percent.

The metric is a key indicator of health because it strips out the impact of newly opened and closed locations.

At Red Lobster, the figure fell 2.6 percent as traffic declined. But Darden is hoping to spark a turnaround in the coming months with its biggest menu overhaul in a decade. To broaden the chain's appeal, the menu will include more chicken and beef dishes; about a quarter of the menu will be non-seafood options, compared with just 8 percent now.

The number of dishes that cost less than $15 will also increase.

Darden CEO Clarence Otis said the changes will be touted in a major ad campaign designed to get lapsed customers to "reconsider the brand."

When asked by an analyst during a conference call about the risks involved with such an overhaul, Otis said "the biggest risk would be to not change."

For its fiscal 2013, Darden stood by its forecast for revenue to rise 9 percent to 10 percent, mostly as a result of the addition of up to 110 new restaurants.

Combined revenue at Olive Garden, Red Lobster and LongHorn Steakhouse locations open at least a year in the U.S. is expected to rise 1 percent to 2 percent. Earnings from continuing operations are expected to climb 5 percent to 9 percent for the year.

Taken together with its LongHorn Steakhouse chain, Darden said sales restaurants open at least a year dipped 0.3 percent in the quarter. But total revenue got a lift from the addition of new restaurant locations and operating margins improved. The company also paid less in income taxes, which boosted results.

For the three months ended Aug. 26, the company earned $110.8 million, or 85 cents per share. That's compared with $106.6 million, or 78 cents per share, a year ago. Earnings from continuing operations were 87 cents per share.

Analysts expected earnings of 83 cents per share, according to a FactSet survey.

Revenue rose 5 percent to $2.03 billion from $1.94 billion a year ago, meeting Wall Street's expectations.

Darden also declared a quarterly dividend of 50 cents per share. The dividend will be paid on Nov. 1 to shareholders of record on Oct. 10.

Shares of Darden rose $2.49, or 4.6 percent, to close at $57.21 Friday after hitting an all-time high of $57.93 earlier in the session.

The Orlando, Fla.-based company owns and runs more than 2,000 restaurants.

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Follow Candice Choi at www.twitter.com/candicechoi


(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)