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Darden Stays Underperform

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We maintain our Underperform recommendation on Darden Restaurants Inc. (DRI - Free Report) based on lower third-quarter fiscal 2013 earnings, sluggish same-store sales performance in recent times and a trimmed guidance.

Why the Reiteration?

Darden’s third quarter 2013 EPS of $1.02 declined 18% from the prior-year quarter. Despite a unique proposition, driven by a diversified business model and cost synergies, Darden has been facing challenges recently. Darden reported weak third-quarter 2013 results, hurt by underperformance of same-store sales at its three restaurant brands – Olive Garden, Red Lobster and LongHorn Steakhouse.

Continued underperformance at one of its core brands, Red Lobster, remains a threat to Darden. Olive Garden has also been exhibiting a volatile growth trend over the last one-year period. In third-quarter 2013, comps at Olive Garden fell 4.1%. LongHorn Steakhouse, which was a better-placed brand till recently, began to deliver negative comps from the second quarter of fiscal 2013 reflecting wavering consumer confidence in the U.S.

In fact, with higher payroll taxes, delayed tax refund and increased gasoline prices, the sales environment is expected to remain choppy going forward as consumer spending is low.

Given such a scenario, Darden slashed its fiscal 2013 outlook prior to its third quarter earnings to reflect the poor performances of the past few quarters as well as the dilutive impact of the Yard House restaurant chain acquisition in 2012. This was the third time that Darden cut its guidance in the last nine months. Earnings guidance for fiscal 2013 was narrowed sharply from the range of $3.29–$3.49 per share to $3.06 and $3.22 per share.

Other Stocks to Consider

Some other restaurant industry stocks with a favorable Zacks Rank include Red Robin Gourmet Burgers Inc. (RRGB - Free Report) , Burger King Worldwide Inc. and Cracker Barrel Old Country Store Inc. (CBRL - Free Report) . While Red Robin and Cracker Barrel retain a Zacks Rank #1 (Strong Buy), Burger King carries a Zacks Rank #2 (Buy).

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