Middle class can't eat out, either

Darden earnings disappoint; shares drop

Demonstrating an overall decline in casual dining, Darden Restaurants on Friday reported first-quarter earnings that were much lower than expected. It also announced major cuts, including job eliminations, Reuters reported.

Darden's holdings include the Olive Garden and Red Lobster chains.

"Darden in the most recent month was a little bit ahead of the industry, so it is a broader industry problem," Jeffrey Bernstein, senior restaurant analyst with Barclays, told CNBC.

In a conference call today, CEO Clarence Otis said Darden would cut costs by $25 million in the current fiscal year and $50 million in 2015, including laying off 85 support staff members, according to Reuters. Otis had stated in a release earlier that the sluggish recovery would continue to affect restaurant sales.

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Matthew DiFrisco, director and senior restaurant analyst at Lazard Capital Markets, told CNBC that the decline of middle-class casual dining could be connected to an unstable housing market.

"I think with the volatility of the mortgage rates and also the frugalness of the consumer that [the] sector's very discretionary, and you saw some contraction there," DiFrisco said.

First-quarter earnings of 53 cents per share fell short of expectations by 17 cents, Reuters said. Net income from continuing operations fell to $70.2 million from $110.8 million, or 85 cents a share, in the year-earlier period.

Midday trade reports showed that Darden shares were down 5.5 percent, to $46.61.

Outside Darden's niche in casual dining, limited-service eateries that don't require tipping are gaining ground.

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"I think you're seeing good strength, though, in brands like Chipotle. They're recovering and seeing some sales momentum," DiFrisco said. Starbucks, Dunkin' Donuts—they're all seeing some above historical same-store sales trends."

Red Lobster in Times Square, New York.
Adam Jeffery | CNBC

Olive Garden, which accounts for half of Darden's sales, saw a 4 percent decline in sales from stores operating for more than 16 months, Reuters said. Red Lobster reported a sales drop of 5.2 percent and the closing of one restaurant. Longhorn Steakhouse had a 3.2 percent sales rise, but increased operating costs reduced overall profit.

In its earnings release, Darden said its smaller brands, including high-end corporate chain Capital Grille, had growth of 3.2 percent in the first fiscal quarter, which ended Aug. 25.

However, Bernstein said, Darden should focus neither on smaller brands that did well nor on the drop at Red Lobster, whose business is traditionally uneven.

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"Olive Garden has been the perennial leader in casual dining for a decade," he said. "So getting Olive Garden right would be a big step in the right direction."

Darden also announced today the retirement of its president and chief operating officer, Drew Madsen, at the end of the second fiscal quarter. Gene Lee, president of the company's specialty restaurant group, will succeed Madsen.

—By Evelyn Cheng, with Reuters reports