Stifel’s Paul Westra expects the U.S. restaurant sector to see a recessionary comp slowdown during 3Q16–2Q18.

Westra downgraded the rating on Darden Restaurants, Inc. (NYSE: DRI) from Hold to Sell, with a price target of $53.

Potential U.S. Recession

The analyst mentioned restaurants have historically led the market in declines during pre-recession periods, with restaurant stocks declining 23 percent versus the S&P 500 decline of 10 percent in the three to six months pre-recession.

Westra expects the casual dining segment to see high risk ahead of a potential U.S. recession.

“Our 2Q16 Stifel Sales Survey results showed a tell-tale pre-recessionary sales slowdown that included a simultaneous -150bps to -200bps deceleration in same-store-sales growth across every industry category,” the analyst stated.

Related Link: Stifel Expects A Recession Within 3 To 9 Months; Bearish On Restaurants

Pre-Recession Slowdown Expected

The analyst expects Darden Restaurants, along with other restaurant companies, to report a 2Q16 comp miss of 30 bps on average, with the 2Q16 Stifel Sales Survey indicating that the industry-wide comp in the restaurant industry during 2Q stood at an increase of 0.7 percent.

“While we suspect that ongoing favorable 2Q16 input-cost inflation will enable “largely in-line” 2Q16 EPS results on average, we believe the 2Q16 earnings season will nevertheless be in stark contrast compared to the prior seven consecutive “beat-and-raise” quarterly results,” Westra said.

The 2H16 comp guidance is expected to be 100 bps below consensus on average.

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