Pasta Perils at Darden
This article is part of ourRising Star Portfolio series.
In retrospect, perhaps I should have waited about a week to purchase shares of Darden Restaurants (NYS: DRI) for the Rising Star portfolio I'm managing for Fool.com. After all, yesterday investors ditched the shares like last week's stale breadsticks after the restaurateur revealed unappetizing 2012 guidance.
Blame Darden's Olive Garden concept; value promotions like never-ending pasta bowls (including never-ending salad and breadsticks) didn't do the trick in luring never-ending strings of customers to the chain.
Meanwhile, in the face of rising food costs, Darden decided not to mess with momentum at Red Lobster and LongHorn Steakhouse by passing too many of those costs on to customers. Therefore, there was little to offset the weakness at Olive Garden.
Now Darden expects 2012 per-share earnings to increase 4% to 7%, a far cry from the previous guidance for 12% to 15% earnings growth. It reduced its sale- growth expectation by 0.5% to a range of 6% to 7%.
Granted, these aren't great tidings; reduced profitability next year also means the price I paid for Darden wasn't as inexpensive as I thought.
However, there's no use crying over spilled milk (or uneaten breadsticks). The lowered price represents a cheaper opportunity than I got when I added Darden shares to the portfolio last week.
Although one could certainly argue that restaurant stocks like McDonald's (NYS: MCD) , Chipotle (NYS: CMG) , and Panera (NAS: PNRA) are all fired-up growth stocks and preferable to Darden, let's also remember that all three of those are currently trading near their 52-week highs. Whether they're trading at reasonable prices now certainly could be called into question.
Meanwhile, I far prefer Darden to beleaguered restaurant stocks like Wendy's (NYS: WEN) or DineEquity (NYS: DIN) , both of which have struggled to turn a profit in the past 12 months. Wendy's has had only one quarter with positive net income out of the past five.
Darden has some work to do in adjusting its Olive Garden menu to fire up its customers more, and at prices they're willing to pay for the value they get in their meals. Meanwhile, CEO Clarence Otis told CNBC he believes food costs will stabilize, and if that's the case, then we're simply dealing with temporary headwinds right now.
I have my eye on the situation at Darden, but I see no reason to cut and run. Although management obviously has some work to do in getting Olive Garden's menu adjusted and sales back up to par, I see no reason for investors to bail out of Darden. Don't sweat the short term, Fools.
If Darden or any of these restaurant stocks are becoming more appetizing, add them to your Watchlist to track all the latest developments:
- Add Darden Restaurants to My Watchlist.
- Add Wendy's to My Watchlist.
- Add Panera Bread to My Watchlist.
- Add McDonald's to My Watchlist.
- Add DineEquity to My Watchlist.
- Add Chipotle Mexican Grill to My Watchlist.
At the time this article was published Alyce Lomaxowns no shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Panera Bread, Darden Restaurants, and Chipotle Mexican Grill.Motley Fool newsletter serviceshave recommended buying shares of Panera Bread, McDonald's, and Chipotle Mexican Grill. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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