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Bear Of The Day: Darden Restaurants (DRI)

Daniel Laboe

Darden Restaurants (DRI), best known for Olive Garden, and Longhorn Steakhouse, has been taken to the cleaners by the novel coronavirus. The government-mandated dine-in shutdowns around the US have effectively halted sales for this restaurant giant. Analysts have been substantially reducing their EPS estimates for DRI over the next couple of years, and I expect this to continue the longer this virus stays active. DRI sits at a Zacks Rank #5 (Strong Sell).

Darden is in the direct line of fire from this pandemic, and its shares have taken a beating. The stock was down almost 70% year-to-date last week but has recovered marginally on the fiscal stimulus rally this week. I see these shares as exceptionally risky due to their direct exposure to this virus, and I would stay away.

Darden Restaurants, Inc. Price, Consensus and EPS Surprise

Darden Restaurants, Inc. Price, Consensus and EPS Surprise

Darden Restaurants, Inc. price-consensus-eps-surprise-chart | Darden Restaurants, Inc. Quote

Demographics Are Important

When looking at the long-term impacts of the novel coronavirus on Darden Restaurants, you need to look at the demographics that their restaurants attract. The majority of the people that are eating at Olive Garden and Longhorn Steakhouse (combined making up over 70% of revenue) are on the backend of the age curve. This age group is most at risk of having complications with the pandemic.

The novel coronavirus is going to change consumer patterns even after the state-wide quarantines are lifted. The age group that is most prevalent at Darden’s restaurants is going to be extra cautious and may decide to stop their weekly trip to the Olive Garden. Baby Boomers don’t want to risk their lives for unlimited salad and breadsticks.

Darden’s aging demographic is also not a good sign for its long-term business outlook, even if the pandemic never occurred.

Overall Bearish Story

The fact of the matter is that we have no idea how long we will need to practice social distancing and how many weeks or even months the “self-quarantine” may last. The number of new cases is still growing exponentially, and Darden’s dine-in restaurants may be shut down for multiple quarters.

Despite its currently healthy balance sheet, no company can afford to operate with a severely depleted topline for an extended period of time. The longer this virus sticks around, the more Darden’s balance sheet will deteriorate.

I am not saying I would short this stock, but I would keep my distance from these infected shares.

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