Olive Garden and Red Lobster owner Darden's
The results at Darden's core concepts were strong. Olive Garden's (40.6% of total restaurants) same-store sales were up a solid 6.4% -- the 45th consecutive quarter this chain has recorded positive growth. Red Lobster (48.5% of total restaurants) saw same-store sales increase 2.7%. Even tiny Bahama Breeze (2.3% of total restaurants) reported a 1.9% increase.
Bucking the upward trend in same-store sales was Smokey Bones, which reported a stiff 8.5% decline (after a 0.1% fall last quarter). Although total sales for this concept increased 31%, that number pales when you realize there were 41% more restaurants open this year. Darden's has been touting this concept as its growth initiative, but the company now says it plans to "moderate" the pace of new restaurant openings and realizes that "further refinement to broaden consumer appeal" is needed.
Let's cut to the chase real quick: The company is trumpeting Olive Garden's ongoing success, yet its store count increased only 21 restaurants over the last year. There was an increase of 34 Smokey Bones stores. It's time to slam on the expansion brakes at Smokey Bones, because after all, growth that's not yielding on an economic basis isn't worth much. And that's what would seem to be the case at Smokey Bones.
The market obviously liked the news. The stock hit an all-time high, closing with a gain of 8% to its merit.
Still, investors interested in owning restaurant stocks would do well to consider other options. Darden's is trading for 17 times expected earnings for the fiscal year ending May 2007. Analysts see 12.3% annual earnings growth for the next five years. That's a rich premium when you can buy Outback Steakhouse
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