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Darden Restaurants Down 41% YTD: What's Hurting the Stock?

Zacks Equity Research

Shares of Darden Restaurants, Inc. DRI have been negatively impacted by the coronavirus outbreak. Moreover, rising costs and a lower-than-expected top line are adding to the downside. Notably so far this year, shares of the company have plunged 41% compared with the industry’s decline of 14.9%. 

Let’s discuss and try to assess what’s hurting this Zacks Rank #5 (Strong Sell) company.

Coronavirus Impact: The coronavirus pandemic is likely to hurt the company’s results. Due to the same factor, the company has withdrawn its 2020 guidance. 

Its same-restaurant sales were down 39.1% for the fourth quarter to date through Apr 5. For the first six weeks of the quarter, same-restaurant sales were up 3.0% and down 0.2%, 20.6%, 75.2%, 74.9%, and 71.2%, respectively.

For the fourth quarter to date through Apr 5, same-restaurant sales declined 34.5%, 36.5%, 47.5% and 50.4% at Olive Garden, LongHorn Steakhouse, Fine Dining and Other Business, respectively.

To contain the spread of this deadly virus, the company closed its dine-in services from Mar 20.  It is now operating its restaurants in a To Go-only capacity. 

High Labor Costs Hurts: Higher labor costs due to increased wages and costs incurred due to the implementation of the Affordable Care Act are expected to continue to keep profits under pressure. Further, the non-franchised model makes the company susceptible to increased expenses.

In the fiscal first, the second and the third quarter of 2020, total operating costs and expenses rose 3.2%, 3.9% and 4.4%, respectively. The increase was caused by an overall rise in food and beverage costs, restaurant expenses as well as labor costs. Notably, increase in expenses are likely to hurt the company’s margin going forward.

Estimates Trending Downward: Let’s take a look at earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company.  Over the past seven days, the Zacks Consensus Estimate for 2020 and 2021 earnings has declined 6.5% and 6.7% to $2.73 and $3.33 per share, respectively. 

Stocks to Consider

Some better-ranked stocks worth considering in the same space include BJ's Restaurants, Inc. BJRI, Denny's Corporation DENN and Chuy's Holdings, Inc. CHUY. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BJ's Restaurants and Denny's have an impressive long-term earnings growth rate of 15%, 9% and 17.5%, respectively.

Chuy's Holdings has trailing four-quarter positive earnings surprise of 21.2%, on average. The company’s earnings beat the Zacks Consensus Estimate in all of the last four quarters.

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