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DRI AT A GLANCE

P/E ► 12.1 AVG EV/EBITDA ► 6.74 AVG ROA ► 9.9% HIGH ROE ► 24.9% AVG Debt to Equity ► 2.00 AVG Current Ratio ► 0.457 AVG Interest Coverage Ratio ► 6.10 AVG

 

 

 

 

 

 

Darden Restaurants Inc. (NYSE: DRI) operates 1,773 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.

Unlike other full service restaurant operators, Darden does not franchise its restaurants.^[2] Because of this, the company must invest between $3.2 and $4.5 million in each new restaurant it opens.^[3]

With $6.63 billion revenue in 2008, Darden Restaurants is the largest casual dining restaurant company in the world.^[4] 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 its smaller chains and acquisitions for the majority of growth. New restaurant openings have averaged 2% for the past 5 years, and Darden wants to maintain same restaurant sales for Olive Garden and Red Lobster. Although Darden expects same store sales to decline by 2.25% in 2009, it is planning on opening 70 new restaurants over the year to position itself for the end of the recession.^[5]

In 2007, restaurant industry sales growth declined from previous years as a result of falling consumer spending and other macroeconomic factors. During the same year, Darden's sales increased by approximately 8%. Perhaps more telling, Darden's same-restaurant sales have continued to grow, albeit more slowly, while its competitors have all posted negative same-restaurant sales growth. 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.

Business Overview

• Olive Garden is the world’s largest Italian casual dining restaurant company and Darden’s highest revenue generating restaurant. There are 647 Olive Garden’s throughout the U.S. and Canada.^[6] In 2008, Olive Garden achieved a record $3.07 billion in sales, and average of $4.9 million per restaurant. Sales for Olive Garden were up 10% from 2007 and comps, also known as same restaurant sales, have increased for the past 55 consecutive quarters.^[7] Olive Garden accounted for 46% of Darden Restaurant's sales in 2008.

• Red Lobster is the casual seafood dining market leader and Darden’s original restaurant chain. Red Lobster has since grown to 651 restaurants throughout the U.S. and Canada.^[8] Red Lobster acheived $2.63 billion in sales, for an average of $3.9 million per restaurant. These sales numbers were an increase of 1.1% increase over 2007, due to a 2.4% increase in average guest check, but offset by a 1.3% decrease in guest counts.^[9] Red Lobster accounted for 40% of Darden Restaurant's sales in 2008.

• Bahama Breeze is Darden’s Caribbean themed restaurant chain. With 23 restaurants in twelve states^[10], Bahama Breeze’s total sales are $138 million, which breaks down to approximately $6 million per restaurant^[11]. Darden is currently restarting an expansion of its island inspired chain. The company closed nine, almost one-third, of its low performing Bahama Breezes in 2007^[12].

• 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 which each generate $6.4 million in sales, or $40 million in total sales^[13]. Darden will roll out with the next phase of Seasons 52’s expansion in 2008 because it sees a high growth potential in Seasons 52^[14]. Darden is hoping Seasons 52 will be a driving factor to help achieve their future growth goals.

Quarterly Business Financials

Darden's Q4 (ending May 31 2009) sales from continuing operations increased by 8% from $1.83 billion in the prior year to $1.98 billion. However, combined same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse were down 1.4% for Q4. The increased revenue in Q4 2009 can largely be attributed to addition of stores as well as an extra week of operating assigned to this quarter. By the end of the quarter, Darden had a total of 1,773 restaurants, an increase from 1,702 restaurants the previous year.^[15]

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^[16], which further proves the importance of its growth and overall success to Darden. Darden is in the process of acquiring LongHorn Steakhouse, a casual dining chain, and The Capital Grille, an upscale steakhouse^[17]. There are currently 300 LongHorn Steakhouses throughout the U.S. and close to 30 Capital Grilles. These acquisitions come on heels of a less than successful attempt to integrate Smoky Bones. The company recently announced plans to sell 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. ^[18].

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. Commodity costs, decreased 2007 second quarter net earnings by nearly 30%. 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

Beginning in 2006, slowing economic growth and widespread concerns among consumers, economists and business owners alike began to take their toll on the restaurant and foodservice industries. Real growth (adjusted for inflation) in restaurant sales was a meager 1.3% in 2007 and is projected to fall further in 2008. ^[19] due to macroeconomic factors. This downturn has largely been a result of lower consumer spending. Initially, rising interest rates in 2006 combined with slowing home appreciation resulted in tighter economic constraints for many consumers. Although the Fed began to lower interest rates in 2007 and continued to do so in 2008, home values have continued to slump along with the general economy. Since the home is considered the primary form of wealth or savings for many Americans, millions of homeowners have suddenly found themselves significantly poorer while facing higher costs in the form of food and energy inflation, and thus are less willing to spend money on eating out. While Darden is far from immune to this trend, it has weathered this difficult environment better than Brinker's, its closest competitor. New store openings continued to drive overall revenue growth during 2007, and same restaurant comps remained positive.

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^[20]. Brinker generated $4.4 B in sales^[21] 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^[22]. Applebee's had $1.2 B in total operating revenue^[23]. 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. Cheesecake Factory had upwards of $1.3 B in sales for 2006^[24] with approximately 130 restaurants. The Cheesecake Factory had a tremendous 19.2% growth in revenue from 2005^[25] and has plans to open 20 restaurants a year^[26].

References

1. ↑ SWY 2008 10-K pg. 1  
2. ↑ {{cite 10k |ticker= SWY |link=http://www.sec.gov/Archives/edgar/data/940944/000119312508152760/dex13.htm |year= 2008 |form= 10-K |pg=10}
3. ↑ {{cite 10k |ticker= SWY |link=http://www.sec.gov/Archives/edgar/data/940944/000119312508152760/dex13.htm |year= 2008 |form= 10-K |pg=6}
4. ↑ 2008 Darden Restaurants 10K Annual Report, p.45
5. ↑ A stock to stomach tough times.
6. ↑ 2008 Darden Restaurants 10K Annual Report, p.4
7. ↑ 2008 Darden Restaurants 10K Annual Report, p.28
8. ↑ 2008 Darden Restaurants 10K Annual Report, p.2
9. ↑ 2008 Darden Restaurants 10K Annual Report, p.28
10. ↑ Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 5
11. ↑ Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 5
12. ↑ Darden Restaurants Inc. 2007 Annual Report, "Strategic Highlights", p. 7
13. ↑ Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 5
14. ↑ Darden Restaurants Inc. 2007 Annual Report, "Strategic Highlights", p. 7
15. ↑ Darden's Q4 2009 Earnings
16. ↑ Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 5
17. ↑ Darden Restaurants Inc. Company Report 9-20-2007
18. ↑ Darden Restaurants Inc. 2007 Annual Report, "Strategic Highlights", p. 7
19. ↑ "Chains Ready Plans to Ride out Economic Downturn," Bnet.com, October 1, 2007
20. ↑ Brinker International Inc. 2007 Annual Report, p. 10, 12, 14, 16
21. ↑ Brinker International Inc. 2007 Annual Report, "Consolidated Statements of Income", p. 9
22. ↑ Applebee's International 2007 Annual Report, p. 2
23. ↑ Applebee's International 2007 Annual Report, p. 2
24. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
25. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
26. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
27. ↑ All metrics from company's annual report