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The Street
The Street
Ellen Chang

Big Issue is Troublesome For This Restaurant Chain's Stock

You can look at a stock's earnings and revenue numbers and get a pretty good picture of what's going on. 

But it's important to consider other fundamentals when evaluating an investment, according Real Money Columnist Stephen "Sarge" Guilfoyle. 

Take Darden Restaurants (DRI) for example. 

“I almost want to like this name,” Guilfoyle wrote in a recent Real Money column. “Readers will see that DRI has been in a downward sloping trend since peaking last September,”

While the latest growth in quarterly sales was stellar,  up 38.1%, the company added 33 new locations during the period. Same-restaurant sales rose by 29.9% at Olive Garden, 31.6% at LongHorn Steakhouse, 85.8% for the Fine Dining segment, and by 55.2% for all other businesses.

The company reported GAAP EPS of $1.93 on revenue of $2.45 billion for the fiscal third quarter. Even though sales shot up by 41.6% year-over-year, the company’s performance still did not meet Wall Street estimates.

But, and this is the problem for Guilfoyle,  Darden’s balance sheet is weak because the company repurchased $382 million worth of outstanding common stock over the three months. Operating costs and expenses rose by 35.5% to $2.15 billion, leaving the company with net income of $247 million.

The company’s current assets fell to $1.28 billion, its third consecutive month of declines while current liabilities rose to $1.82 billion, resulting in a current ratio at an ugly 0.7, down from 0.85 three months ago.

“The implication would be that at some point in the near to medium term, Darden could have a difficult time meeting the firm's obligations,” he wrote. “I've got to tell you that I was really starting to like this name until I got to the balance sheet. This balance sheet does not pass my test and that will impact my decision.”

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