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Darden Serves Up Some Bad News


But over the long run the stock could still cook.

The casual dining space is an extremely difficult place to trade these days. Just ask Darden Restaurants (DRI). On Tuesday the Florida based chain, known for its Olive Garden, Red Lobster and LongHorn Steakhouse locations provided what could probably best be described as a very lackluster outlook for its first quarter.

More specifically, the chain said that excluding certain adjustments and costs it expects to earn 60 to 62 cents a share in its Q1.The trouble with that is that per Yahoo Finance the company had been expected to turn in 75 cents a share.

What happened?

Reuters quoted a Darden spokesman as saying, "people were not in the restaurants in the volume we were anticipating."

Geez, I could have told you that.

But seriously folks, this news is a problem for the company because the letdown comes at what I think is a bad time. I mean, tax loss selling season is just around the corner, and with the stock now more than 37% off its 52-week high, I'm concerned it could take an even bigger beating.

Also think about what this might potentially mean for other players in this space. I mean if these chains aren't ripping the cover off the ball, how are other, perhaps less well-known chains going to fare? I think it's also got to be making the folks over at Brinker (EAT), which owns the Chili's concept, a little nervous too.

Another tidbit tossed in the press release that turned me off was its same-store sales forecast. More specifically, Darden indicated that this, "combined U.S. same-restaurant sales, are expected to decline -1.1% versus the prior year."

Folks, that's pretty lousy.

Also, digging down a bit deeper the company said it expects a 2.4% same-restaurant jump at Olive Garden. Now that's not the end of the world by any stretch, but I would point out that the number doesn't appear to be all that impressive given that in the year that just ended the concept posted a 4.9% jump in US same-restaurant sales.

Finally, per Reuters, "excluding one-time items, it expects earnings to be flat to up 5 percent from the $2.74 it posted in fiscal year 2008, down from a previous forecast calling for a 9 percent to 10 percent increase."

My concern about that is how do you think that the analyst community will react? I suspect that we may see a flurry of adverse reports being disseminated in the days ahead.

In sum, this news took me by surprise and I think it's going to be viewed as a negative for the company and its shareholders. That being said, I do believe that toward the end of the year the stock could end up being a heck of a bargain.

A full release is due out on September 16th after the close. Stay tuned.

Darden closed at $28.25, down $4.01 or 12.43%.
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No positions in stocks mentioned.

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