QUOTE AND NEWS
Motley Fool  Oct 25  Comment 
From fried chicken to burgers and breadsticks, these three restaurants juggle a love-hate relationship with both diners and investors alike.
SeekingAlpha  Oct 22  Comment 
By Main Street Wins: Darden (NYSE:DRI) is one of the largest operators of casual dining restaurants, with many iconic brands under its portfolio including Olive Garden, LongHorn Steakhouse, and several others. Since April 2010, shares of Darden...
Wall Street Journal  Oct 16  Comment 
The new board of Darden said it would bring back former board member Bill Simon, the recently departed U.S. chief of Wal-Mart, expanding the board to 13 members.
Motley Fool  Oct 15  Comment 
Activist investors -- one; Darden Restaurants -- 0.
Motley Fool  Oct 14  Comment 
Italian restaurant chain's parent witnessed an unprecedented house cleaning at its annual meeting, but now it's a matter of whether there are too many chefs in the kitchen
New York Times  Oct 14  Comment 
Recent shake-ups at Darden Restaurants and Hewlett-Packard show that the easiest corporate response is to give in, Steven Davidoff Solomon writes in the Deal Professor column.
TheStreet.com  Oct 14  Comment 
NEW YORK (TheStreet) -- Darden Restaurants shares are up 2.34% to $48.14 on Tuesday after the restaurant chain named Gene Lee as the company's interim CEO, replacing long time CEO Clarence Otis, who was ousted earlier this year. Lee had been...




 

Darden Restaurants Inc. (NYSE: DRI) operates 1,824 (as of 10-K 2010) restaurants in the United States and Canada.[1] 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.[2]

Unlike other full service restaurant operators, Darden does not franchise its restaurants.[1] 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.[3]

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.

Company Overview

Business and Financial Metrics

FY2009 Full Year Earnings summary (ended May 31, 2009)[4]

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.

Q1 FY2010 Earnings Summary (ended August 30, 2009)[5]

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.

Q2 FY2010 Earnings Summary (ending November 29, 2009)[6]

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.

Q3 FY2010 Earnings summary (ended February 28, 2010)[7]

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.

Q4 FY2010 Earnings Summary (ended May 30, 2010)[8]

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).

Q1 FY2011 Earnings Summary (ended August 31, 2010)[9]

Darden posted a net income of $113.1 million, ($0.80 earnings per share) for the first reporting quarter of FY2011.[10] This figure was a 19% increase compared to $0.67 earnings per share.[11] 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.[12]

Total same-restaurant sales from Olive Garden, Red Lobster and LongHorn Steakhouse were up 1.1% in the quarter.[13] 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.[14]

Q2 FY2011 Earnings Summary (ended November 28, 2010)[15]

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.[16] 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.[17]

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.[18] 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.[19]

Olive Garden

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.[20]

Red Lobster

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.[20]

LongHorn Steakhouse

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.[20]

The Capital Grille

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.[20]

Bahama Breeze

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.[20]

Seasons 52

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

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DRI Breakdown of Stores Open Throughout Company History[21]

Trends and Forces

Growth Driven by Smaller Brands and Acquisitions

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[22], 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[23]. 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. [24].

Rising Food Prices Impact Bottom Line

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.

DRI Weathers Restaurant Downturn Better than Competitors

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.[20]

Competitors

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:

  • Brinker International (EAT): Brinker's owns and operates approximately 1,800 casual dining restaurants such as Chili's, Macaroni Grill, On The Border, and Maggiano's[25]. Brinker generated $4.4 B in sales[26] and is Darden's closest competitor. Although Brinker's operates 500 more restaurants, Darden has higher operating margins than Brinker's. Brinker's has announced plans to expand its flagship restaurant, Chili's by close to 700 restaurants over the next few years, as well as enter the steakhouse segment.
  • Applebee's International (APPB): Applebee's operates and franchises 1,930 Applebee's Neighborhood Bar and Grill restaurants[27]. Applebee's had $1.2 B in total operating revenue[28]. Applebee's most closely competes with all of Darden's restaurants for casual dining customers, but the company itself is significantly smaller than Darden.
  • Cheesecake Factory (CAKE): The Cheesecake Factory and its secondary chain, Grand Lux Cafes directly compete with Darden's brands, The Olive Garden and Season's 52. Each brand has similar cuisines and price points.
Darden and its Competitors[29]
Company Net Sales (Mill) Operating Income Profit Margin Operating Margin Sales Growth Total Restaurants
Darden Restaurants (FY2009)[30] $7,113 M $543.6 M 5.7% 9.5% (1.4%) 1,824
Brinker International (EAT) (FY2009)[31] $2,859 M $154.5 M 4.8% 5,4% 5.2% 1,550
Cheesecake Factory (CAKE) (FY2009)[32] $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 %
McDonald's (MCD) $22,745$4,55120.0%32,47881%
Yum! Brands (YUM) $10,836$1,08310.0%37,000
Starbuck’s (SBUX) $9,775$3914.0%16,63547%
Darden Restaurants (DRI) $7,218$3725.2%1,7730%
Brinker International (EAT) $3,621$792.2%1,68940%
Wendy's International (WEN) $3,581$40.1%6,45180%
Burger King Holdings (BKC) $2,537$2007.9%11,92588%
Jack in the Box (JACK) $2,471$1315.3%2,21246%
CKE Restaurants (CKR) $1,419$483.4%3,14171%
Domino's Pizza (DPZ) $1,404$805.7%9,33991%
Panera Bread Company (PNRA) $1,353$876.4%1,38058%

Data from company FY 2009 annual reports (CKE data from FY annual, ended January 31, 2010).



References

  1. 1.0 1.1 DRI 10-K 2008
  2. Darden Restaurants 10-K 2009
  3. Darden Restaurants Considers Expansion
  4. Darden Restaurants Reports Fourth Quarter and Annual Diluted Net Earnings Per Share; Increases Quarterly Dividend by 25 Percent
  5. Darden Restaurants Reports 16% Increase in First Quarter Diluted Net Earnings Per Share; Announces Quarterly Dividend of 25 Cents Per Share
  6. Darden Restaurants Reports Second Quarter Diluted Net Earnings Per Share of 43 Cents; Announces Quarterly Dividend of 25 Cents Per Share
  7. Darden Restaurants Reports 22% Increase in Third Quarter Diluted Net Earnings Per Share; Increases Annual Diluted Net Earnings Per Share Outlook; Announces Quarterly Dividend of 25 Cents Per Share
  8. PR Newswire: "Darden Restaurants Reports Fourth Quarter and Annual Diluted Net Earnings Per Share; Increases Quarterly Dividend by 28 Percent" June 23, 2010
  9. Darden Restaurants Reports 19% Increase in First Quarter Diluted Net Earnings Per Share; Announces Quarterly Dividend of 32 Cents Per Share
  10. Red Lobster Owner Lurches Lower
  11. Analyst: Darden leader in recovering industry
  12. Darden's Fiscal 2011 Starts Out Strong With Revenue and Margin Gains
  13. Profit up for Red Lobster, Olive Garden's operator
  14. Darden Restaurants Reports 19% Increase in First Quarter Diluted Net Earnings Per Share; Announces Quarterly Dividend of 32 Cents Per Share
  15. [1]
  16. Darden 2Q meets Street; sales growth below pace
  17. Darden shares drop: Company outlook disappoints
  18. Darden Gets Cooked On Slippage In Comps
  19. Darden restaurants' results disappoint
  20. 20.0 20.1 20.2 20.3 20.4 20.5 Darden Restaurants Annual Report 2010
  21. DRI 2009 Form 10-K, Page 2-3
  22. Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 5
  23. Darden Restaurants Inc. Company Report 9-20-2007
  24. Darden Restaurants Inc. 2007 Annual Report, "Strategic Highlights", p. 7
  25. Brinker International Inc. 2007 Annual Report, p. 10, 12, 14, 16
  26. Brinker International Inc. 2007 Annual Report, "Consolidated Statements of Income", p. 9
  27. Applebee's International 2007 Annual Report, p. 2
  28. Applebee's International 2007 Annual Report, p. 2
  29. All metrics from company's annual report
  30. Darden 10-K FY2010
  31. Brinker 10-K FY2010
  32. CAKE 10-K FY2010
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