The Fastest Growing Casual Restaurant Chain Belongs to … Darden Restaurants?

Who could have guessed this about the struggling Olive Garden parent?

Jul 20, 2014 at 10:00AM

Inside Yard House.  Source:  Darden Restaurants

"I would just quickly say, I think the Yard House is very well positioned in the market place, as strong appeal the volume in Gen X households," stated Gene Lee, President and COO of Darden Restaurants (NYSE:DRI). Believe it or not, the upscale-casual chain may have a much bigger future than you think and could be a game changer for Darden Restaurants.

Chipotle is hotter than peppers
Chipotle Mexican Grill (NYSE:CMG) as you know is part of the fast-casual restaurant industry, but investors often use it as a benchmark to strive for when they look for that next great restaurant return. The stock has risen to dizzy heights on the heels of fantastic top- and bottom-line growth.

Nation's Restaurant News revealed that Chipotle Mexican Grill was the fourth-fastest growing national restaurant chain last year among all restaurant categories (and not just fast casual). It bases its ranking on systemwide sales growth instead of revenue, so it ranks companies by their product sales (mostly food and drink) rather than their franchise or royalty revenue.

For 2013, Chipotle's unit count grew by 12.5% and sales per unit grew by 3.6%. This led Chipotle Mexican Grill to overall sales of $3.2 billion and growth of 17.3%. Interestingly, it also posted the highest amount of total system-wide sales of any restaurant chain in the top 10. Across many industries companies often find it more of a challenge to show superior percentage growth on already huge sales in comparison with smaller competitors such as the smaller chains from Darden Restaurants.

Inside Yard House.  Source:  Darden Restaurants

The growing green yard
Coincidentally, around three years after Chipotle Mexican Grill was started, Steele Platt founded The Yard House and it opened in December 1996. Platt said in an interview a few years ago, "I saw the power of mixing classic rock, draft beer and a simple menu together." The flagship restaurant opened with 250 different draft beers on tap. In another interview in 2011 Platt stated succinctly, "I know what sells. People like beer. People like classic rock."

And it's still selling quite well apparently. For 2013, Darden Restaurants saw its brewhouse sales jump by 20.1% to $406 million on a 2.6% gain in unit sales to $8.5 million and an 18.2% leap in units to 52. This was on top of a 17.4% gain in system-wide sales in the year before. Average, and growing, unit sales of $8.5 million are extremely high for any restaurant chain.

A large part of that occurred because bar customers came in and purchased beer which can obviously be quite expensive anywhere for guests but extremely profitable for restaurants. Keg prices vary wildly, but a restaurant only needs to sell a few glasses to cover the cost of the beer and then it's all profit from there (before labor and other costs). Close to 40% of the average check at Yard House comes from alcohol which is among the highest in the restaurant business. 

YhSource:  Darden Restaurants

Beyond the current yard
With the popularity of craft beers exploding across the US while Yard House has a wide variety of craft beer choices, it's little wonder that Darden Restaurants is seeing such strong results pour from the chain. As Harald Herrmann, President of Yard House, put it back in February 2013, "We are a microbrew festival."

Currently Yard House only represents a small percentage of Darden Restaurants' Red-Lobster-excluded sales at just around 7%, but you should expect that to go up and start to contribute more materially.

When Darden Restaurants announced the acquisition of Yard House two years ago, it had just 39 locations. It's still small at 52, but it has gotten off to an excellent start with 33% unit growth. It seems like the parent company has big plans. Clarence Otis, CEO of Darden Restaurants, stated publicly in late 2012 that the company sees the potential for 150 to 200 restaurants in total.

At just flat unit sales that would put Yard House's contribution to Darden Restaurants between $1.3 billion and $1.7 billion in sales per year, presumably with an extremely healthy profit margin.

Foolish takeaway
The Yard House wild card may be just what Darden Restaurants needs. Fools should pay close attention to this chain in particular as it could breathe new life into the company which has, to put it kindly, been experiencing a bit of a malaise as of late. 

Classic rock is one way there is opportunity for investment based on living rooms
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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