After Dumping Red Lobster, Does Darden Restaurants Have a New Lease on Life?

It has been a difficult last 12 months at restaurant chain Darden Restaurants (NYSE: DRI  ) , epitomized by declining customer traffic volumes at its key brands. These chains have anecdotally been hurt by the rise of a host of so-called fast-casual restaurant players, led by Chipotle Mexican Grill (NYSE: CMG  ) , offering fresh, quality food at more reasonable prices. A lack of business momentum has led to a stagnant stock price for Darden and has raised the ire of some of its shareholders, including activist hedge fund Starboard Value, currently bidding to dethrone the board.

However, Darden recently sold its Red Lobster unit for roughly $2.1 billion, over the vocal objections of Starboard, a transaction that should provide the opportunity to pay down some of its debt and refocus resources on its key brands, like Olive Garden. So, is it time to bet on a new day at Darden?

What's the value?
Darden is the nation's largest casual-dining restaurant company, operating a network of more than 2,100 locations that run the gamut of price points, from Capital Grille on the high end to Bahama Breeze on the low end. Its diversified portfolio has generally been a winning formula, with growing brands offsetting declining brands, thereby allowing the company to generate consistent overall profitability. The net result for Darden has been solid cash flow, fueling the expansion of its existing store base and investments in new concepts.

In its latest fiscal year, though, some chinks have started to appear in Darden's armor, as evidenced by declining comparable-store sales at its key brands. In addition, rising marketing and store labor costs put a dent in the company's average per-store profit margin, leading to a double-digit decline in its overall operating income. More important, those same trends have continued unabated in fiscal year 2014, compounded by higher commodity costs, especially for seafood and beef.

An uphill battle
Certainly, selling the underperforming Red Lobster operation should help Darden in theory, allowing management to focus on reinvigorating its stable of remaining brands. Indeed, most of management's current efforts seem to be centered on upgrading the attractiveness of its Olive Garden brand, which accounts for nearly 40% of its total store base, through new menu introductions like its lower-priced Cucina Mia platform.

That said, Darden seems to have an uphill, though not impossible, battle in its quest to recapture lost customers from the fast-casual segment, especially players like Chipotle Mexican Grill  that benefit from a shared healthy-eating mission with their customers, not to mention a pricing advantage. While some members of the fast-casual crowd have had trouble maintaining customer volume growth in the current environment, Chipotle has had no trouble finding new customers, reporting volume growth in its latest fiscal quarter despite the weather-related issues that stymied players like Panera Bread and Noodles & Co. Combined with higher average prices, the net result for Chipotle was solid operating profit growth, up 13.1% during the period, helping to fund its growth initiatives, including plans for another 10% addition to its overall store base in 2014.

A better way to go
Given the negative volume trends at Darden, investors looking for gold in the casual dining space would probably find better returns with players that continue to add to their overall customer base despite the challenging environment, like Buffalo Wild Wings (NASDAQ: BWLD  ) . More than 30 years after its founding, the king of wings continues to report strong top-line growth, up 21.7% in its latest fiscal year, benefiting from its ability to position its locations as ideal sports-watching venues for rapid fans.

More important, the company's stores continue to find new customers, as evidenced by rising comparable-store sales during the period, a trend that has helped it to keep its operating profitability at a healthy level, despite volatility in raw chicken wing prices. The future is also looking bright for Buffalo Wild Wings, as its concept seems to have some portability, with early-stage success in Canada and Mexico.

The bottom line
Mr. Market didn't seem particularly enthralled with Darden's sale of its Red Lobster unit, giving the company only a marginal push higher since the announcement of the transaction in mid-May. That likely indicates a view that Darden's problems won't be a quick fix and profit growth may still be a ways off. As such, investors should probably watch the action in Darden from the safety of the sidelines.

Feast on this exciting tech news!
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2014, at 10:35 PM, arg wrote:

    It looks like Fridays quarter may not be so good because Clarence Otis made an insider sale of his stock on May the 16th. This shows how much confidence he has in himself if he can't wait until after Fridays quarter earnings announcement to sell his shares! I think he should man up and resign and do what is right for the company!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2991330, ~/Articles/ArticleHandler.aspx, 10/2/2014 12:31:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement