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On Jan 2, Zacks Investment Research downgraded restaurateur Darden Restaurants Inc. (DRI - Analyst Report) to a Zacks Rank #5 (Strong Sell) due to dismal second-quarter fiscal 2014 results, weak guidance for fiscal 2014 and underperformance in two of its core brands, Red Lobster and Olive Garden.

Why the Downgrade?

Estimates have been going down ever since Darden reported weak second-quarter fiscal 2014 results on Dec 19, 2013. The company missed the Zacks Consensus Estimate for both earnings and revenues in the second quarter. Quarterly earnings were down 42.3% year over year due to higher total costs and expenses.

The company has been witnessing a slowdown in comps since the past few quarters mainly due to weak sales performance in its Red Lobster and Olive Garden brands. In second quarter, comps declined 0.6% at Olive Garden and 4.5% at Red Lobster. With higher payroll taxes, delayed tax refund and increased gasoline prices, the sales environment is expected to remain choppy in fiscal 2014 as consumer spending is low.

The restaurant chain is also facing a tough time on the margins front due to higher food costs which in turn is significantly hurting the bottom line.

Given such a scenario, Darden slashed its fiscal 2014 outlook to reflect the poor performances in the first two quarters of fiscal 2014. The company expects earnings for fiscal 2014 to decline in the range of 15.0% to 20.0% year over year much worse than its prior expectation of a decline of 3.0% to 5.0%.

The company also lowered its expectation for blended comps growth for its three core brands in the range to (1.0%) to (2.0%) versus its prior expectation of flat to up 2% due to the decline in comps at Red Lobster in the first and second quarter of fiscal 2014.

Following the muted outlook for fiscal 2014, estimates were largely revised downward. The Zacks Consensus Estimate for fiscal 2014 decreased 11.1% over the last 30 days. The Zacks Consensus Estimate for fiscal 2015 also declined 9.1% over the last 30 days.

In order to boost shareholders’ value, the company declared several comprehensive plans which include a possible spin-off or sale of its underperforming Red Lobster segment. We believe although Darden has undertaken a set of initiatives to boost its business, the benefit might not be sufficient for bottom-line growth amid faltering consumer confidence.

Other Stocks to Consider

Some better-ranked stocks in the restaurant industry include Fiesta Restaurant Group, Inc. (FRGI - Snapshot Report), The Cheesecake Factory Inc. (CAKE - Analyst Report) and Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report). While Fiesta Restaurant sports a Zacks Rank #1 (Strong Buy), Cheesecake Factory and Cracker Barrel carry a Zacks Rank #2 (Buy).

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