Who's Serving Up the Best Operating Performance -- Darden, Brinker, or Bravo Brio?

According to the National Restaurant Association's February tracking survey, restaurant operators are divided on what the near future holds for their industry. Economic conditions will improve, says 29% of respondents. But a nearly equal number, 26%, expect conditions to deteriorate. The rest, a 51% majority, say things will be generally unchanged.

With those clashing opinions, we might expect that some restaurant chains are performing significantly better than others. That's why we'll look at Darden Restaurants (NYSE: DRI  ) , Brinker International (NYSE: EAT  ) , and Bravo Brio Restaurant (NASDAQ: BBRG  )


(Photo courtesy of stock.XCHNG)

Not an (olive) garden of delights
Darden Restaurants, which refers to itself as "the world's largest full-service restaurant company," has more than 2,100 locations and generates annual sales in excess of $8.5 billion. Its familiar brands include Olive Garden, Red Lobster, and LongHorn Steakhouse, but it also has a smaller specialty-restaurant group with brands it hopes to grow in the future.

The company is in a state of transition as it tries to cope with lackluster results at a time when other restaurant companies are reporting impressive sales and profit gains. One of its initiatives is to pursue the sale of or spin off its Red Lobster group.

On March 3, the company released a sampling of results for its third quarter ended Feb. 23 in advance of the earnings release scheduled for March 21. This financial appetizer wasn't that tasty. Darden says it expects year-over-year U.S. same-restaurant sales to decline 5.4% at Olive Garden and 8.8% at Red Lobster, with LongHorn Steakhouse achieving a tiny 0.3% gain.

The company reported a brutal December, with same-restaurant sales down more than 10% at both Olive Garden and Red Lobster. The punishing weather was part of the problem, the company said, along with Thanksgiving being in a different fiscal quarter in 2013 in comparison to 2012. Despite removing the combined 410 basis point effect of those factors, same-restaurant sales would still have been down more than 6% in December.

The outlook for 2014 is turbulent as well, with Darden forecasting a decline in diluted net earnings per share of between 15% and 20% compared to 2013.

Things are brighter at Brinker
As of year-end 2013, Brinker International owned, operated, or franchised 1,557 Chili's Grill & Bar restaurants, as well as 45 Maggiano's Little Italy restaurants.

For its fiscal second quarter ended Dec. 25, the company announced that sales rose 2.3%. Chili's domestic comparable-restaurant sales rose 0.3%; Maggiano's reported a more robust 0.9% increase, the 16th consecutive quarterly increase.

For Chili's company-owned locations, customer traffic declined nearly 2% from the year-ago quarter -- which had declined nearly 2% from the same quarter of 2011. Within the casual-dining segment, it's still an intense battle for each customer. 

If we look at the first two quarters of Brinker's fiscal year, total revenue rose just 1.1%. The company did a good job of controlling company-restaurant expenses, which declined 10 basis points as a percentage of sales.

It's easy to summarize Brinker's performance for the half-year: revenue increased $15 million, total operating costs rose only $10 million; so an additional $5 million fell to operating income. Net income was up 6% compared to the first half of 2012.

Restaurant chains are increasingly looking to international markets to fuel growth, exporting their well-known brands abroad where the competition in the casual-dining segment may not be as rugged. Chili's projected restaurant openings for 2014 include 34-39 Chili's international locations and only 10-13 Chili's domestic locations.

In search of greater brio
Bravo Brio Restaurant operates two Italian restaurant brands, BRAVO! Cucina Italiana and BRIO Tuscan Grille. The BRAVO! restaurants feature a Roman ruin decor with an open-style kitchen so guests can observe the chefs preparing the meals. BRIO serves up the delicious flavors of Italy's Tuscany region.

In late February the company announced full-year 2013 results, and performance definitely lacked a certain amount of brio. Revenue increased just 0.5% from 2012 to $411 million. Comparable-restaurant sales fell 2% at BRAVO! and even more at BRIO: 3.4%.

As a percentage of revenue, the cost of sales was down 40 basis points, but labor costs rose 60 basis points; as did restaurant operating costs.

The overall higher operating costs contributed to the $14.7 million negative variance in operating income from a year ago. A non-cash asset impairment charge caused $10.1 million of the variance; but even with that removed, operating income fell compared to 2012.

For 2014, management expects comparable-restaurant sales to be between negative 2% and positive 1%. Just so-so, in other words.

Bravo Brio hopes to stop the negative comparable-restaurant sales trend through expanding its lighter-fare menu as well as introducing a new happy hour program and weekend brunch.

The company intends to be conservative in new store openings until the sales trend reverses course.     

What we learned
To bring former customers back and entice new ones, Darden has implemented a "Brand Renaissance" plan. This includes an enhanced menu for Olive Garden announced Feb. 24 with what it says are "exciting new offerings." These changes include lower-calorie dishes, meals with more modest portions, and the option to mix and match pastas and sauces.

The question is: Are these changes enough to change customer perception of the chain?

Darden's brand renaissance clearly has a long way to go. In the news there have been squabbles reported; significant shareholders are displeased with the company's strategic direction and analysts write negative opinions about the company.

But with Darden's size, scope, customer base, and brand strength, all that's required is to secure a strategy that resonates with today's consumers.

This is a restaurant environment where it's better to be serving upscale customers the way that Ruth's Hospitality Group (think sizzling platters of prime beef) does or to have a fresh, fun, fast-casual concept such as Fiesta Restaurant Group, two companies I recently wrote about.

My favorite of the three companies we focused on today is Brinker International.

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Related Tickers

11/28/2014 12:03 PM
BBRG $13.37 Up +0.10 +0.75%
BRAVO BRIO RESTAUR… CAPS Rating: ***
DRI $57.12 Up +1.26 +2.26%
Darden Restaurants… CAPS Rating: **
EAT $56.65 Up +1.09 +1.96%
Brinker Internatio… CAPS Rating: **

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