By Steve Gelsi, MarketWatch
NEW YORK (MarketWatch) — Darden Restaurants Inc. tumbled 10% on Tuesday in its biggest one-day loss in a a year after the company warned it would fall short of Wall Street’s profit estimates as its recent meal-discount programs failed to fatten its bottom line.
The results drew at least one downgrade of the stock and bearish comments from a hedge fund that has taken out a short position on the company’s shares.
Darden (NYSE:DRI) , which operates Olive Garden and Ed Lobster eateries among others, said it expects adjusted second-quarter profit of 25 or 26 cents a share, below the analyst estimate of 46 cents a share in a survey by FactSet.
Shares of Darden fell $5.24 to $47.18 as the worst performer among components of the S&P 500.It’s the biggest move down for the stock since it fell 12% on Dec. 6, 2011, according to FactSet data.
S&P Capital IQ cut its rating on Darden to hold from buy.
“Besides a slow-growing economy, we believe DRI’s marketing campaign has not succeeded in rebuilding its brand,” analyst Jim Yin said in a note to clients. “Thus, we think traffic will stay weak, as consumers continue to shift toward lower-priced menu offerings. We also see margin pressure from rising commodity prices.”
In a statement, Darden Chief Executive Clarence Otis said promotions by the company were comparable to past plans but they “did not resonate with financially stretched consumers as well as newer promotions from competitors.”
He said the results for the quarter were “disappointing.”
November same-restaurant traffic at Olive Garden fell 4.8%, on top of an 8.2% drop in October. Red Lobster’s same-restaurant traffic dropped 3.3% in November and 6.1% in October.
Recently, Red Lobster offered a buy-one-get-one deal on Black Friday.
On Nov. 19, Darden announced the departure of its chief marketing officer, who left to become chief executive of Ruby Tuesday. A successor has not been named.
Howard Penney, managing director of Hedgeye Risk Management, said in a phone interview he took out a short position on Darden over the summer. Such an investment produces profits for investors if the stock price goes down.
He’s long on Yum Brands Inc. (NYSE:YUM) , Jack in the Box Inc. (NASDAQ:JACK) and Starbucks Corp. (NASDAQ:SBUX) , he said.
Darden should consider eliminating its dividend, he said.
“They can’t afford to do what they’re doing,” he said. “There seems to be no plan to fix it. It’s really a disaster.”
Red Lobster has been offering lunches for a roughly 60% discount of $7.99 and “it isn’t working,” he said.
In his Twitter feed, Penney said Darden, “can’t pay all its bills with more leverage” and added that its promotional efforts aren’t bearing fruit. He also said the drop in same-store traffic at Olive Garden “is a secular decline, not economic conditions.”
The Orlando, Fla., restaurant chain said it’ll book about 5 cents a share in second-quarter acquisition costs related to its purchase of Yard House, USA Inc.
Superstorm Sandy also impacted its second-quarter results by about a penny a share.
For fiscal 2013, Darden cut its adjusted earnings outlook to a range of $3.29 to $3.49 a share, which includes 10 cents a share in closing costs. Analysts estimated 2013 earnings of $3.87 a share. The company’s earlier outlook was $3.83 to $4 a share.
I’VE HEARD THAT EVEN FRIEDCHICKENLAQUESHA HAS CUT BACK TO THREE BUCKETS PER DAY