Darden Restaurants (DRI) might be facing a temporary slowdown. Here’s why

When Darden Restaurants (NYSE: DRI) recently said it continues to expect a slowdown in full-year comparable restaurant sales, the statement came as a surprise to those who believe the current market conditions are favorable for fast-food restaurant operators. The company has been witnessing a slowdown in sales, though the core brands remained in the positive territory aided by the strength of the popular menu offerings.

In the Offing

While offering customers the best service, the company will hopefully focus on what is being served to investors, who will be looking for cues on improving the top-line performance in 2020. It is important to initiate steps to boost traffic for the core brands of Olive Garden and Longhorn Steakhouse, which have been hit by a slowdown since the beginning of the current fiscal year. Though things improved in recent months, it failed to cheer up the market.

Revival Plan

Overall, it has been a mixed show as far as customer traffic is concerned. Going forward, the ongoing efforts to reduce costs and improve pricing should reflect more profoundly in the company’s financial results.

Related: McDonald’s misses Q3 earnings target by 10 cents

The stock, which maintained a steady uptrend over the years, entered 2019 on a positive note and hit a record high a few months ago. However, the trend was reversed in the following weeks and the withdrawal gathered pace after the second-quarter earnings report.

Mixed View

Analysts are divided in their recommendations for the stock, in line with the market’s mixed outlook on the company. Their price target – around $126 that represents a 17% upside – shows that the stock has the potential to rebound from the current lows and reach a new peak in 2020.

On Friday, brokerage firm Argus downgraded the stock to hold from buy, saying that profitability will be negatively impacted in the near term by rising costs and softness in comparable-store sales. The stock traded down 1% following the rating action.

Also see: Darden Q2 2020 Earnings Conference Call Transcript

In the second quarter, positive same-store performance and contributions from new stores drove up sales by 4% to $2.06 billion. As a result, earnings rose 20% year-over-year to $1.12 per share and topped the Street view. Meanwhile, sales and comparable store sales missed the estimates, driving the stock sharply lower after the announcement.

Thriving Market

Underscoring the popularity of fast-food stocks among investors, restaurant operator Chipotle Mexican Grill (CMG) gained a whopping 73% this year, partially aided by the rally that followed the company’s positive third-quarter results a few months ago.

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