Is Darden as Good as Dead?

Source: Wikimedia Commons

After reporting revenue and earnings for the third quarter of its 2014 fiscal year, shares of Darden Restaurants (DRI 0.61%) rose nearly 3% to close at $50.66. Even though the company's performance fell short of expectations and management relayed to shareholders that this would likely be the case, the rise in its shares suggest that the business's jump on high volume might be a sign of better times ahead. Is this truly the case, or is Darden's picture nowhere near as good as some shareholders believe it to be?

Darden's results were worse than expected
For the quarter, Darden reported revenue of $2.23 billion. This represents a 1% drop compared to the $2.26 billion the restaurant chain reported a year earlier and fell shy of analyst estimates by the same amount. In its release, the company's management team attributed the decline to a drop in comparable store sales across the board. The most severe case involved Red Lobster, which saw its comparable-store sales plummet 8.8%.

In terms of profits, Darden reported profits that matched management's revised forecast but fell shy of the $0.93 per share initially forecasted by analysts. For the quarter, the company's earnings per share came in at $0.82, 20% lower than the $1.02 the business reported the same quarter a year earlier. On top of being harmed by less revenue, the company was negatively affected by soaring costs.

Compared to the same period a year earlier, Darden's food and beverage expenses rose from 30.8% of sales to 31.2%. This was driven by rising costs in the company's Red Lobster operations, but was partially offset by a drop in costs in its LongHorn Steakhouse chain.

Selling, general and administrative expenses also rose for the quarter, from 8.8% of sales to 9.4%, while its miscellaneous restaurant expenses rose from 15.4% of sales to 16.2%. At face value, these changes may not look severe but, when aggregated, the company's pre-tax income would have been $40 million higher had these changes not taken place.

Is Darden the best, or are there better opportunities out there?
Despite its recent troubles, Darden has had a fairly good run over the past five years. Between 2009 and 2013, the company's revenue has risen 18.5% from $7.2 billion to $8.6 billion, while its net income ticked up 11% from $372.2 million to $411.9 million. While this is a decent improvement, it falls far short of other restaurants like Chipotle Mexican Grill (CMG 0.88%) and Panera Bread Company (PNRA).

Source: Darden, Chipotle, and Panera

Over the same timeframe, Panera saw its top line rise a whopping 76% from $1.4 billion to $2.4 billion. This rise in sales was due in part to an increase in the number of locations in operation, but it was also due to a substantial rise in the business's comparable-store sales (something Darden is lacking.) Based on the 12% increase in sales the company reported between 2012 and 2013, it appears as though its growth prospects are becoming more limited, but its situation looks more attractive than Darden's.

Source: Darden, Chipotle, and Panera

In terms of profits, Panera's position looks even more attractive. During the past five years, the company's net income rose 128% from $86.1 million to $196.2 million. To make things even tastier, the company's 2013 net profit margin of 8% is significantly higher than the 5% posted by Darden.

While Panera makes Darden look subpar, Chipotle makes everything appear in a dull light. Over the same timeframe as its peers, Chipotle grew its revenue 117% from $1.5 billion to $3.2 billion. Just as in the case of Panera, the company's revenue growth stemmed from a rise in store count and an increase in comparable store sales, both of which were more extreme than Panera's.

From a profitability perspective, Chipotle continued to impress. Between 2009 and 2013, the fast-casual chain grew its bottom line by 158% from $126.8 million to $327.4 million. At 10%, the company's net profit margin makes even Panera look a bit disappointing, but it should be noted that the chain's profitability is only half the 20% seen by larger, more established rival McDonald's.

Foolish takeaway
Based on Darden's quarterly performance, it's evident that the business has some problems, but its long-term results make it look like the company's shortfalls may be nothing more than a bump in the road. Either way, there is considerable risk to the Foolish investor if management can't turn its business around, even after spinning off its Red Lobster assets. Under that type of scenario, the Foolish investor might feel more comfortable looking at either Panera or especially Chipotle for a nice mixture of growth and profitability.