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Why Darden Restaurants' Shares Were Grilled

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Darden Restaurants (NYSE: DRI  ) , operator of Red Lobster, Olive Garden, and LongHorn Steakhouse, dove as much as 11% after cautioning that its second-quarter earnings forecast wouldn't meet Wall Street's expectations.

So what: Darden received whammies from every angle today. It lowered its fiscal second-quarter EPS outlook to an adjusted $0.25-$0.26 versus Wall Street's projections for a profit of $0.47. Darden noted that same-store sales declines are expected in all three of its big chains as its promotional items simply didn't lure customers into its restaurants as well as its competitors. On top of this, it'll take a $0.01 charge related to Hurricane Sandy and is receiving negative publicity for cutting back worker hours in light of the Affordable Care Act, which is set to take effect in 2014. All in all, I'd call that a bad day at the office.

Now what: No restaurant is safe at the moment. Multinational companies such as McDonald's (NYSE: MCD  ) and Yum! Brands (NYSE: YUM  ) are suffering from negative currency exchange rates and weaker spending in both Europe and even China. Domestically, Chipotle Mexican Grill (NYSE: CMG  ) is dealing with rising food costs and the inability to raise prices on its customers for fear of chasing them to competitors. There really is just no winning right now in the restaurant sector. Until the fiscal cliff picture improves and U.S. GDP begins marching in the right direction, this is a sector I'd slap a huge "avoid" sticker on.

Can Chipotle return to its high-growth ways soon, or will rising food costs and increased competition squash its high-growth dreams for good? Get the answer to this question and much more by getting your copy of our latest premium research report on Chipotle Mexican Grill. Packed with in-depth analysis on the opportunities and threats facing Chipotle -- and complete with a year of regular updates -- this report will give you the tools needed to make smart long-term investing decisions. Click here to learn more.

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Related Tickers

10/21/2016 4:04 PM
DRI $63.07 Up +0.19 +0.30%
Darden Restaurants CAPS Rating: ***
CMG $411.94 Up +6.84 +1.69%
Chipotle Mexican G… CAPS Rating: ****
MCD $113.93 Up +3.36 +3.04%
McDonald's CAPS Rating: ***
YUM $86.97 Up +0.77 +0.89%
Yum! Brands CAPS Rating: ****