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Darden Restaurants, Inc. (DRI): Struggling With Affordability

While Brinker has more growth opportunity than Darden (due to a smaller geographic footprint), the management team recently lowered guidance for this year. Management blamed the decline on lower discretionary income resulting from higher payroll taxes, and higher gas prices.

It’s interesting to note that Brinker International, Inc. (NYSE:EAT) trades at a lower valuation than Darden, despite the fact that Brinker is still growing earnings by 15% annually, while Darden’s growth has essentially flatlined.

Yum! Brands, Inc. (NYSE:YUM) is a notch lower in terms of quality of food, but the company is also struggling to maintain growth levels as consumers cut back on spending.

Yum! Brands, Inc. (NYSE:YUM) is particularly vulnerable to a slowdown in China, where the company has been aggressively growing its emerging-market presence. For the last quarter, Chinese same store sales declined 20% — not exactly a vote of confidence for the company’s emerging market expansion.

Part of this decline was due to publicity following a supply issue with bad poultry, but the entire company is still dealing with tighter margins and reduced consumer spending on a global basis. The company’s worldwide profit margin declined 14% last quarter and management still expects earnings to decline for 2013.

No recovery in sight
As consumers continue to deal with a challenging employment environment and higher energy prices, casual restaurant chains will be forced to compete based on price. With lower menu prices and tighter profit margins, earnings will be constrained leading to lower stock prices.

For Darden Restaurants, Inc. (NYSE:DRI) in particular, I would not be surprised to see the stock decline to near $30. At $30 per share, the stock would trade at a multiple of 10 times next year’s expected earnings, and would represent a 38% drop from current prices.

Don’t be enticed by the stock’s recent decline. Darden still trades at a premium valuation, considering the diminished profit outlook and the challenges in the restaurant industry.

Zachary Scheidt has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Zachary is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Darden Restaurants: Struggling With Affordability originally appeared on Fool.com and is written by Zachary Scheidt.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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