Darden Restaurants Inc. (NYSE: DRI) operates 1,824 (as of 10-K 2010) restaurants in the United States and Canada. The company's chains include Olive Garden, Red Lobster, LongHorn Steakhouse, Capital Grille, Bahama Breeze, and Seasons 52. Restaurants in the Darden portfolio served over 404 million meals in fiscal 2009.
Unlike other full service restaurant operators, Darden does not franchise its restaurants. Darden has announced plans to increase EPS, earnings per share, by 10-15% annually, but with its flagship chains, Olive Garden and Red Lobster, reaching market saturation, the company will have to rely on new methods to increase sales. For example, the company recently announced that it will look into expanding to college campuses and airports where the company will open more to combination-style restaurants, where both Red Lobster and Olive Garden are packed under the same roof.
Since 2007, the restaurant industry's sales growth declined as a result of falling consumer spending and other macroeconomic factors. Darden has recovered strongly from the recession, with net income increasing from $372.2 million in fiscal 2009 to $404.5 in fiscal 2010. Its positive same-restaurant sales can be attributed to strong customer loyalty and value-based meal specials. Programs like Lobster's Fresh Catch Club for frequent customers strengthen customer loyalty by offering special coupons, meal deals, as well as updates about new menu items. Other coupons and value-based meals act as incentives to boost customer traffic. Although Darden's competitors have similar value-based programs, Darden has also focused on quality of service and cleanliness as a means of gaining customer loyalty. In addition, Darden has altered its menu to demonstrate the health benefits of its cuisines, like seafood at Red Lobster to increase customer visits.
In 2010, Darden continued outperforming competitors in terms of same-store sales, on average posting lower declines in same-store sales than rivals, with blended same-store sales falling 2.3% in the fiscal fourth quarter as compared to the -5.9% industry benchmark.
Darden ended full year FY2009 with diluted net earnings per share of $2.65, a 4% increase compared to $2.55. Darden realized that integration costs and purchase accounting adjustments did reduce this figure by $0.10 in FY2009 and $0.19 in FY2008 though. Excluding these costs and other associated charges, net earnings per share should have been $2.75 in FY2009.
Performance in individual restaurant chains overall were positive. Olive Garden, for example, hit record total sales and operating profit of $3.29 billion for sales, a 7.2% increase compared to FY2008, and average annual average sales per restaurant came to $4.8 million, where U.S. same-store sales increased 0.3% throughout FY2009. Red Lobster came as $2.62 billion in sales, a decrease of 0.2% compared to FY2008. Finally, Longhorn Steakhouse's total sales came to $888 million, an increase of 3.6% compared to FY2008.
Darden reported first quarter sales from continuing operations of $1.73 billion, a 2.3% decrease compared to $1.77 billion in first quarter FY2009. Further, a combined same-restaurant sales for Olive Garden, Red Lobster, and Longhorn Steakhouse was down 5.3% in the quarter, but was better than a decline of 7.8% for the Knap-Track U.S. same-restaurant sales benchmark, excluding Darden.
Better than benchmark results were attributed to Darden's Marketing and Restaurant Operations team, which has tried to cope with recent changes in a field which has been battered by the economic recession. During recessions, households tend to cook more at home rather than eat outside. Further, Darden was helped by favorable food and energy costs.
Darden ended its second reporting quarter of FY2010 with quarterly sales from continuing operations of $1.64 billion, compared to $1.67 billion in second quarter FY2009, a 1.6% decrease. The combined total of same-restaurant sales for Olive Garden, Red Lobster and Longhorn Steakhouse was down 4.7%. However, excluding the impact of Thanksgiving holiday week, which was accounted in this reporting quarter but not for same quarter last fiscal year, blended same-restaurant sales were 3.9%. This figure is better than decline of 5.9% for the Knapp-Track U.S. same-restaurant sales benchmark, excluding Darden. Darden attributes heavy discounting during the quarter for its competitively strong sales, and the performance reflects industry leading brands as despite the economic situation, loyal customers are still continuing to flock to Darden's restaurants as a place to dine.
Darden reported third quarter sales from continuing operations of $1.87 billion, a 4.2% increase compared to $1.80 billion in third quarter FY2009. The combined total for same-restaurant sales in Olive Garden, Red Lobster, and Longhorn Steakhouse increased 1.3% this quarter compared to prior year period. Excluding the impact of the holiday Thanksgiving week however, the blended same-restaurant sales rose only 0.5%. This figure was better than the industry index from the Knapp-Track benchmark of U.S. same-restaurant sales of -4.3%. Darden attributes the more severe weather experienced this year compared to last to have a negative effect of 60 bp compared to fiscal year prior. Overall though, net earnings were $134.8 million or $0.95 per diluted share, and is an improvement compared to last year of $108.1 million or $0.78 per share.
Fourth quarter sales from continuing operations were $1.86 billion, compared to $1.98 billion in the prior year, a 5.7% decrease. Restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse were down 2.3% this quarter. In the fourth quarter, diluted net earnings per share from continuing operations decreased 7% to 81 cents, versus 87 cents in the prior year.
For the fiscal year, diluted net earnings per share from continuing operations increased 8% to $2.86 from $2.65 in the prior year, which included an additional fiscal week. The additional fiscal week contributed approximately six cents of diluted net earnings per share in fiscal 2009. For the full year, fiscal 2010 sales from continuing operations were $7.11 billion, a 1.4% decrease (52 weeks vs. 53 weeks) from the prior year’s $7.22 billion. Restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse were down 2.6% in fiscal 2010 (52 weeks vs. 52 weeks).
Darden posted a net income of $113.1 million, ($0.80 earnings per share) for the first reporting quarter of FY2011. This figure was a 19% increase compared to $0.67 earnings per share. In terms of revenues, first quarter sales were $1.81 billion, a 4.2% increase compared to $1.73 billion, which was guided by same-restaurant sales.
Total same-restaurant sales from Olive Garden, Red Lobster and LongHorn Steakhouse were up 1.1% in the quarter. In particular, Olive Garden rose by 2.7% and so was LongHorn Steakhouse by 2.2%, which was driven by price increases and menu mix benefits. Although shoppers continue to cut spending in restaurants in a downtown, the company continues to use promotions such as Red Lobsters "Endless Shrimp" promotion to boost customers.
Darden posted earnings of $74.5 million ($0.53 EPS) for the second reporting quarter, a 24% increase compared to $60.3 million ($0.43 EPS) same quarter last year. DRI's top line also rose 5% to $1.73 billion from $1.64 billion same quarter last year. DRI attributes a 1.4% increase in sales at locations open more than one year for the cause of both top and bottom line growth.
Sales were up 2% at Olive Garden, 6.8% at Longhorn Steakhouse, and down 1.6% at Red Lobster. Based on a sales growth rate of between 5% to 6% as projected by management, DRI reaffirmed that it expected 2011 profits to be up 14% to 17% totaling $2.86 EPS. Despite this news, DRI was down 2% on day of news release as the 1.4% same-store sales growth did not meet analyst expectations when the company switched Red Lobster's "Endless Shrimp" promotion from television to digital advertising.
Olive Garden is the world’s largest Italian casual dining restaurant company and Darden’s highest revenue-generating restaurant. As of the end of fiscal 2010, there were 723 Olive Gardens in the U.S. and Canada generating $3.32 billion, annually. Average annual sales per restaurant were $4.7 million and U.S. same-restaurant sales increased 1.0% for the fiscal year.
Red Lobster is the casual seafood dining market leader and Darden’s original restaurant chain. As of the end of fiscal 2010, there were 694 Red Lobsters in the U.S. and Canada (an increase of 4 over the prior year) generating $2.49 billion annually, a 5.3% decrease compared to last year. Average annual sales per restaurant were $3.6 million and U.S. same-restaurant sales decreased 4.9% for the fiscal year.
LongHorn Steakhouse is Darden’s steakhouse chain that caters to a broad market. In fiscal 2010 this chain opened 10 new restaurants, for a total of 331 restaurants with annual sales of $882 million, a decrease of 0.7% compared to last year. Average annual sales per restaurant were $2.7 million and U.S. same-restaurant sales decreased 1.8% for the fiscal year.
The Capital Grille is Darden’s upscale steakhouse chain. In fiscal 2010 this chain had 40 restaurants (an increase of 3 over the prior year) with annual sales of $242 million. Average annual sales per restaurant were $6.2 million and same-restaurant sales decreased 7.8% for the fiscal year.
Bahama Breeze is Darden’s Caribbean-themed restaurant chain. With 25 restaurants in 12 states, Bahama Breeze’s total sales for fiscal 2010 were $130 million. Average annual sales per restaurant were $5.4 million and same-restaurant sales decreased 2.9% for the fiscal year.
Seasons 52 is Darden’s newest restaurant chain. It is known for its seasonally inspired lower-calorie meals and international wine collection. Since its opening in 2003, it has grown to seven restaurants, generating $43 million in sales, an average of $5.9 million per restaurant ref> Darden Restaurants 2009 Annual Report, p. 1</ref
Much of Darden's long-term growth will have to come from acquisitions and the growth of its smaller chains. In the past Darden has experienced set backs in both of these areas. Darden is in the early stages of expanding Bahama Breeze and Seasons 52. Darden has already tried expanding Bahama Breeze without success, but will try again with a new approach. Darden is slowly expanding Seasons 52 in the South and will continue to grow the chain. Of Darden's four chains, Seasons 52 has the most sales per restaurant with $6.4 M, which further proves the importance of its growth and overall success to Darden. In 2007, Darden acquired LongHorn Steakhouse, a casual dining chain, and The Capital Grille, an upscale steakhouse. These acquisitions came on heels of a less than successful attempt to integrate Smoky Bones. In 2007 the company sold the Orlando-based casual dining chain. Prior to the announcement, Darden was forced to close 54 poorly performing Smokey Bones restaurants and there were 73 remaining at the end of 2007. .
For casual dining restaurants like , Darden, commodities prices, particularly, prices for food items such as [[beef prices|beef), and grain can have a dramatic impact of on the bottom line. In an effort to help cut losses from rising costs, menu item prices have been increased 2-3% annually.
Slowing economic growth and widespread concerns among consumers, economists and business owners took their toll on the restaurant and foodservice industries. This downturn has largely been a result of lower consumer spending. The bursting of the housing market bubble and the 2008 financial crisis dramatically reduced the wealth of many Americans, making consumers less willing to spend money on eating out. While Darden is far from immune to this trend, it has weathered a tougher economic climate better than some of its competitors: combined U.S. same-restaurant sales Darden’s top three chains – Olive Garden, Red Lobster and LongHorn Steakhouse - declined 2.3% in fiscal 2010, well under the 5.6% decline for the Knapp-Track benchmark of U.S. same-restaurant sales excluding Darden.
The restaurant and foodservice industries are extremely competitive, especially within the casual dining sector. Darden's had $5.6 billion in revenue operating 1324 restaurants. Darden's main competition includes:
|Company||Net Sales (Mill)||Operating Income||Profit Margin||Operating Margin||Sales Growth||Total Restaurants|
|Darden Restaurants (FY2009)||$7,113 M||$543.6 M||5.7%||9.5%||(1.4%)||1,824|
|Brinker International (EAT) (FY2009)||$2,859 M||$154.5 M||4.8%||5,4%||5.2%||1,550|
|Cheesecake Factory (CAKE) (FY2009)||$1,602 M||$73.7 M||2.7%||4.6%||(0.27%)||161|
The table below shows fiscal 2009 data for the largest publicly traded food service competitors.by revenues. Subway and Dunkin’ Donutes, also major players, are privately owned.
|Company||Revenues (M)||Net Income (M)||Net Margin||Restaurants||Franchised %|
|Yum! Brands (YUM)||$10,836||$1,083||10.0%||37,000|
|Darden Restaurants (DRI)||$7,218||$372||5.2%||1,773||0%|
|Brinker International (EAT)||$3,621||$79||2.2%||1,689||40%|
|Wendy's International (WEN)||$3,581||$4||0.1%||6,451||80%|
|Burger King Holdings (BKC)||$2,537||$200||7.9%||11,925||88%|
|Jack in the Box (JACK)||$2,471||$131||5.3%||2,212||46%|
|CKE Restaurants (CKR)||$1,419||$48||3.4%||3,141||71%|
|Domino's Pizza (DPZ)||$1,404||$80||5.7%||9,339||91%|
|Panera Bread Company (PNRA)||$1,353||$87||6.4%||1,380||58%|
Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).