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Darden Gets Bit by Its 'No Discount' Strategy

Longhorn Restaurant
Courtesy of Darden
Longhorn Restaurant

Darden Restaurants, the operator of LongHorn Steakhouse, Olive Garden and Red Lobster, has never been one to look for a short-term pop from using discounts to lure diners into its restaurants, but that strategy can sometimes be tough for investors to swallow.

As consumers begin dining out more, Darden's competitors have been easing off the discounts, and they've been seeing a big boost in their average check. This means it's not so easy for Darden to outshine its rivals, and Darden's shares are taking a hit as a result.

But Chairman and CEO Clarence Otis defended the company's peformance in the latest quarter.

"We feel like we had a very strong quarter," Otis told CNBC in an interview.

Although the company's same-store sales growth failed to dazzle investors, the company's 20-percent earnings growth did top analysts' estimates.

Instead of using discounts, Darden prefers to feature products such as Crabfest at Red Lobster locations several times a year to create news about its chains.

Looking ahead to the rest of the year, Otis expects its business to benefit as the economy slowly improves.

"When you look at our industry, for example, the industry is flat this quarter, that's better than the prior quarter by about a point," Otis said. "A year ago, the industry was down 8 percent, so this is definately an improving environment. We'd all love to have it improve even more, but we're comfortable with this, when you look at the enviroment we're in."

An improvement in the environment may be coming just in time. Darden, and other restaurant chains, will likely have to rely more on improving sales to drive earnings rather than relying on lower costs to improve profit margins, as food costs are expected to rise.

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