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Florida-based Darden Restaurants (NYSE: DRI ) is set to expand its boundaries. The company has entered into a deal with the Malaysian cafe chain Secret Recipe. Darden's foray into South East Asia will start with 13 restaurants in the country, comprised of Red Lobster, LongHorn Steakhouse and Olive Garden. But what does this mean for Darden investors?
The answer to this is three-fold.
Malaysia means profits
Firstly, Malaysia is synonymous with high demand for the service sector. As of 2012, the country was the 10th most visited tourist destination in the world. With the government's focus on the hospitality and restaurant sectors in the economy, 2014 will bring in more demand than ever before. This makes it the perfect time for Darden to make a foray into Malaysia. Furthermore, in 2010 the company took steps towards entering Malaysia by opening a lobster farm in the country. In the long run, home-grown lobsters are sure to mean lower costs and higher profit margins. Also, an investment in Malaysia will imply a diversification of risk for a company like Darden, which is mainly concentrated in the US.
Welcome to Asia
If an entry into Malaysia isn't cause enough for joy, wait until you hear more about Secret Recipe. An alliance with Secret Recipe can only mean one thing for Darden: profits.
Secret Recipe has a strong international presence across Asia, from China to the Philippines. In fact, it is one of the most sought-after brands in the region. In the future, Darden can rely on Secret Recipe's expertise and stronghold in Asia to build a strong network of restaurants. The deal will facilitate Darden's expansion across other emerging nations, especially China, which will bring forth higher demand.
Et tu, Buffalo?
What makes these Asian economies so special? The fact that they are comprised mostly of the middle class, which has a preference for casual dining. The same point was driven home by Buffalo Wild Wings (NASDAQ: BWLD ) earlier this year. In August, the sports bar franchise announced its plan to expand operations to the Philippines . Like Darden, Buffalo Wild already has operations in Latin America and the Middle East.
Chipotle Mexican Grill (NYSE: CMG ) may also expand its international operations to Asia in the future. The company has already flirted with Asian cuisine via its Asian brand, ShopHouse Southeast Asian Kitchen. The move is a clear indicator that Chipotle believes that Asia might prove to be a profitable market for its food. The company is mostly concentrated in the US and has a lot of scope for international expansion.
Bottom line boost
Most importantly, Darden's decision to enter Malaysia might just be the much-needed boost to its profit margins. High demand and sales in Malaysia might help the company's profitability at home. A major problem for Darden in the past few quarters has been its high costs and labor expenses. In its last quarter, the company saw a rise in its total cost and expenses, now up to 95.9% of sales . This resulted in a 37.6% decline in diluted net earnings per share, despite a 6.1% growth in total sales in the quarter.
While some may think that rising costs and lower profits are a common problem for all fast food chains, this is not so; Darden's peers are doing just fine. In its last quarter, Buffalo Wild managed to report a 0.5% decline in total costs and expenses as a percent of revenue to 92.1%. The company reported a massive 41.4% growth in net earnings. The company is so optimistic about its future that it plans to add 1500 more units in the next 5-7 years.
Of gains and losses
Another reason for Darden's fall in profitability is declining consumer traffic due to pricing issues. Not that the company isn't trying to woo customers. The latest offering is an ongoing Crabfest at Red Lobster, with items starting at as low as $14.99.
Turns out that Darden's loss is Chipotle's gain. The latter reported 18.2% growth in revenue last quarter, with a 13.9% increase in net income. High demand for its burritos and tacos keep the customers coming in at its 1,500-plus outlets across the globe. The company has been experiencing growth in customer traffic every quarter. And just in the last quarter, 44 new stores were opened.
What to do?
Darden has had a rough time lately; in the past year its stock has fallen nearly 17%. International expansion might just turn out to its savior. Malaysia is a big opportunity for Darden, but how the company capitalizes on it has yet to be seen. Keeping that in mind, I think Darden is a wait-and-watch stock, and investors should keep track of further growth moves that the company makes. Once it picks up on growth, the stock would be a good investment, especially given its consistent dividend growth and current yield of 4.7%.