Gross, operating, and net margins all improved for both the fourth quarter and the year. This follows the trend I noted in my earnings forecast article. Looking at another metric, average inventory for fiscal 2006 fell as a percentage of revenue, compared with fiscal 2005, despite a rising cost of seafood -- the stock in trade at Red Lobster. That means either that other food items are decreasing in cost or that Darden is handling inventory better, or both. This is good to see, since fresh food inventory at restaurants either has to be used fairly rapidly or written off. In fact, it ended the fiscal year with less total inventory than it had at the end of fiscal 2005.
Most readers are probably already familiar with the two primary concept restaurants for Darden, namely Olive Garden and Red Lobster. With almost 600 Olive Gardens and almost 700 Red Lobsters, the company pretty much covers the U.S. and also has a presence in Canada. It also has two other much smaller concept restaurants: Bahama Breeze and Smokey Bones. And finally, there is the very small Seasons 52 chain.
Both of them internally developed concepts, Bahama Breeze and Smokey Bones are spread across the central, eastern, and southeastern U.S., the former with 126 location and the latter with 32. Bahama Breeze offers seafood and other fare with a Caribbean theme, and Darden is in the process of evolving the menu and making it more relevant for a wider variety of occasions before continuing expansion. Smokey Bones, meanwhile, offers barbecue and grilled food in a mountain-lodge type setting that offers up plenty of televised sports. This concept is struggling -- comps declined by 7.7% for the quarter and 3.7% for the year. Plans are to move away a bit from the barbecue theme, expand the menu, and work on margins. Except for new stores under construction, expansion is on hold for Smokey Bones until these issues get worked out.
When asked on the earnings conference call about the current state of consumer sentiment and dining habits, management pointed out that the company has ridden through many different economic and consumer environments in the 30 years it's been in business. Company leaders thus think the current environment is more due to sentiment -- that people are cutting back on dining out and going only to the places they're loyal to. Yet considering the comps growth, that loyalty apparently includes Darden's restaurants. When pressed further, they said that people are getting adjusted to, for instance, more expensive gas prices and higher interest rates. Darden will not try to drive traffic by lowering prices but rather will address the consumer experience to make it as memorable as possible. It does not want to dilute the brand over the long term by worrying too much over what it believes to be relatively short-term issues.
The company is a mid-cap, valued at about $5.5 billion with room to grow. Addressing the issues at Bahama Breeze and Smokey Bones will allow those two concepts to grow and, with any luck, become as successful as Olive Garden and Red Lobster. Add in management's long-term outlook and the possibility that Darden might buy another chain if the price is right, and I think there's quite a bit of growth left. Darden is definitely worth a look behind the menu.
- The forecast and numbers for this quarter, plus year-end results.
- Cheesecake Factory, meanwhile, is doing well.
- But Outback isn't.
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Fool contributor Jim Mueller notes with glee that there are Smokey Bones and Bahama Breeze locations in his home city. He'll have to go and check them out with his wife. Research, you know. He does not own shares in any company mentioned, adhering to the Fool's strict disclosure policy.