What's Taking a Bite Out of Darden?
Darden Restaurants warned that sales weakened this quarter, and the company isn't the only one, one pro says.
Rachael Rothman, an analyst with Susquehanna Financial Group, is seeing broad weakening in hospitality-related stocks, including gaming, hotel, cruise line and restaurant companies.
"So in each of our four sectors, we've either seen the pace of gains slow or the pace of declines steepen," Rothman said.
Macroeconomic trends from the consumer are not strong and even hotel demand is weakening, she added.
The announcement from Darden, which is typically a top industry performer, follows a similar slip in U.S. results from McDonald's, another industry leader.
Darden CEO Clarence Otis cited the poor performance of promotions that failed to "resonate with financially stretched consumers as well as newer promotions from competitors" as a cause of the drop in same-store sales.
"Our disappointing results for the quarter point to the need for bolder changes in the promotional approach at our three large brands," Otis said. To counteract these trends, the company will be "retooling" such offers for the remainder of the year.
"Unfortunately the efforts that they've unveiled to this point have yet to actually take hold, and so they are issuing a pretty big disappointment here both for the quarter and for the full year citing negative same-store sales at of their core brands," Rothman said.
Rothman said the company has been trying to reengage with its core customer, who is choosing to go somewhere else at this point.
"What you're going to need to be fearful of though is that they do highlight in the release that based on current trends and where they think their core customer's wallet is, they are going to need to focus even more on value and as you know, it's pretty difficult to price discount your way to profitability and to growth," Rothman said.
Following the news, the company's shares fell sharply in trading on Tuesday. Last month, Rothman downgraded the stock to "neutral" from "positive" with a $58 price target.
So whose gain is Darden's loss?
Within casual dining, Darden customers could be switching to competitors that are showing positive same-store sales growth, such as Brinker International, which owns Chili's. They might also be trading up or trading down into fast food.
"So I think they are getting squeezed by both sides," she said.
Investors will get another read into the "financially stretched" Darden customer when the company reports final fiscal second-quarter results on Dec. 20.
—By CNBC.com's Katie Little; Follow Her on Twitter @katie_little
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