Back to top

Bear of the Day

Have you eaten at an Olive Garden lately? Fewer people are. Darden Restaurants Inc. (DRI - Analyst Report) has been struggling to turn around its flagship Italian restaurant chain while sales are also down at its Red Lobster and LongHorn Steakhouse chains. Earnings are expected to slide 12.1% in Fiscal 2013 while it attempts to right the ship.

Darden operates 2000 of the most recognizable casual dining restaurants in the United States, including Olive Garden, Red Lobster, LongHorn Steakhouse, Bahama Breeze and the Capital Grille.

Olive Garden, its flagship restaurant, hit a rough patch in recent years as a stale menu and higher prices turned consumers off. The company has been forthright in acknowledging the problems, though, and is making changes including remodeling old restaurants and offering new menu items. Although, the changes won't come soon enough to save this fiscal year.

Cut Q3 Guidance In February

In February 2013, Darden shocked analysts with a bearish outlook for its fiscal third quarter. It projected same store sales down 4.6% with all three of its main restaurant brands getting hit hard. It also offered third quarter EPS guidance between $1.00 and $1.02, which was much lower than the Zacks Consensus Estimate of $1.13.

In response, all the analysts cut their estimates for the quarter and the full fiscal year. The Zacks Consensus for Fiscal 2013 has fallen to $3.15 from $3.37 since the announcement.

Not surprisingly, given the cuts on the estimates from the analysts, the Zacks Rank also fell to a Zacks Rank #5 (Strong Sell).

Fiscal Third Quarter Results In Line

On Mar 22, Darden released the actual third quarter results. Same store sales DID decline 4.6%, which was the preliminary forecast in February.

Some of the individual chains performed a bit better than expected however. Red Lobster same store sales were down 6.6% but Darden had pre-announced them as declining 7%. Olive Garden, though, fell slightly more than expected at a decline of 4.1% compared to the 4.0% forecast.

Darden made on the high end of its quarterly guidance range of $1.00 to $1.02, as it posted $1.02 in the quarter. Darden re-confirmed the full year guidance between $3.06 and $3.22.

The company said it was seeing traffic improvement in the fiscal fourth quarter due to new menu categories at the Olive Garden like the lighter Italian fare menu. Consumers want to eat healthier and cheaper. Items under $15 are also selling better at the Red Lobster.

Darden is also targeting the lunch crowd at both Olive Garden and Red Lobster, thinking that it was an untapped market. It is rolling out new menu options specifically for this market segment.

No Turnaround Yet

Darden is a turnaround story but the earnings just aren't there yet. Check out this price and consensus chart which shows the dramatic decline in the earnings estimates for Fiscal 2013 and Fiscal 2014.

If you're looking for a restaurant stock with doesn't have turnaround concerns, you may want to consider Red Robin Gourmet Burger (RRGB - Analyst Report) instead. It's a Zacks Rank #1 (Strong Buy) and expected to grow earnings by 6% in 2013.

Want More of Our Best Recommendations?

Zacks' Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.

Learn More>>

Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
UNITED THER… UTHR 117.83 +28.51%
TRIQUINT SE… TQNT 20.67 +6.52%
VASCO DATA… VDSI 14.77 +4.68%
BANCO DO BR… BDORY 15.53 +3.95%
STRATTEC SE… STRT 80.24 +3.00%