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Darden, Other Casual Dining Chains Take Stock Hit On Higher Costs

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By LAUREN SHEPHERD, The Associated Press

Published: December 20, 2007

NEW YORK - With prices of wheat, meat, dairy and other staples rising as consumer spending slows, investors in casual dining operators headed for the exits Wednesday, pushing restaurant shares to lows not seen in more than a year.

The stampede was triggered by an earnings report from Darden Restaurants Inc., which Tuesday night reported profit dropped 30 percent, with higher costs largely to blame.

Shares of IHOP Corp., Brinker International, Ruby Tuesday, P.F. Chang's China Bistro, Ruth's Chris Steak House and Cheesecake Factory all hit 52-week lows, as analysts and investors interpreted Darden's results a harbinger for difficult days ahead.

Darden shares fell the most Wednesday, sinking $7.74, or 21 percent, to $28.60, their lowest point in more than two years.

Darden Chief Financial Officer Brad Richmond said higher costs for dairy and wheat were major factors in its earnings miss. All restaurants are paying more for ingredients, particularly those two items, which have been pressured by strong international demand and a diminishing global supply this year.
Wheat prices are at record highs, soaring above $10 a bushel this week. Poor weather, most recently in Australia and Argentina, has led to depleted U.S. supplies, driving up prices.

Wholesale milk and dairy costs have jumped as well, with the U.S. Department of Agriculture predicting Class 1, or beverage, milk prices rising 44 percent year-over-year in the first quarter of 2008.

Raw milk prices partly reflect higher costs for fuel and feed. Animal feed is made with corn, but so is ethanol, and the price of corn has skyrocketed on demand for the alternative fuel ingredient.

Morningstar analyst John Owens said the stock declines are mainly because of those higher costs, along with a general foreboding in the market. Restaurants also face consumers cutting back on spending because of rising gas prices and economic jitters from the weak housing market.

Darden seemed to weather the difficulties well this year. Sales were higher than at most chains, and the positive trend appeared poised to continue.

But in the second quarter, Darden looked more like its competitors. Guest traffic and sales at locations open at least a year fell toward the end of the period at its two biggest chains, Olive Garden and Red Lobster.

Bear Stearns analyst Joseph Buckley said the sales and commodity costs imply profits are at risk for all restaurant chains "where you eat with a fork."

At pancake house IHOP, the recent acquisition of troubled Applebee's chain has prompted investors to push shares down 27 percent since the buyout was announced in July. The stock hit a low of $37.70 Wednesday, before edging back to $38.55, down $4.19, or 10 percent, for the day. Among some other major chains:

•Shares of Brinker, parent of Chili's Grill & Bar, fell $1.07, or 5.2 percent, to $19.40.

•P.F. Chang's China Bistro shares dropped $1.62, or 6.4 percent, to $23.67.

•Ruby Tuesday was off 35 cents, or 3 percent, at $11.65.

•Ruth's Chris, where prices are slightly higher than at other chain restaurants, shares slipped 41 cents, or 4 percent, to $9.86.

•Cheesecake Factory traded at a 52-week low of $21.22 before rebounding on news that billionaire activist investor Nelson Peltz received approval for his investment fund to a buy a stake in the company. Shares rose $2.37, or 10.7 percent, to $24.54.

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