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Forget Olive Garden, This Is the Chain Darden Restaurant Inc. Investors Should Be Watching

By Rich Duprey - Oct 11, 2015 at 11:26AM

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The continuing popularity of craft beer means this restaurant chain could tap the keg of its full potential.

When you're here you're family, but it may be one of Darden Restaurants other chains, not Olive Garden, that is the big growth story. Photo: Olive Garden

Third time is the charm for Darden Restaurants (DRI -0.04%), as its Olive Garden Italian food chain recorded higher comparable sales for the fourth straight quarter and also notched its first quarter of higher traffic in recent memory.

The results of its fiscal year 2016 first quarter seem to mark a turning point for the restaurant chain, which has only managed to increase its comps by raising prices. Yet now that it is also attracting more customers to its restaurants once again, it could vindicate management's focus on the eatery.

However, that's not where Darden should be concentrating. Sure, Olive Garden generates 56% of the restaurant operator's quarterly revenue of $1.69 billion, and at $192 million, more than three times the segment profits of any other chain in the portfolio (LongHorn Steakhouse, with $57 million, was second).

But more than pasta, and even beyond steak, Darden Restaurants has a chain in its fold that promises to supercharge its growth.

Chug-a-lug expansion
According to the Brewers Association, the craft beer industry is maintaining the torrid pace of growth it has enjoyed over the past few years, expanding at a 15% rate over the first six months of 2015 by producing 12.2 million barrels of beer. Craft beer now accounts for more than 10% of all beer sold, a milestone it achieved last year.

As of the end of June, there are 3,739 breweries operating in the U.S, up by almost 700 from the year-ago period, and more importantly, there were an additional 1,755 breweries in the planning stage. That suggests craft beer still has some heady demand before it.

So a restaurant chain that bills itself as having over 4,000 gallons of beer flowing from more than 100 taps ought to be well-positioned to capitalize on the love affair Americans are having with craft beer.

One hundred bottles of beer on the wall ... Yard House has over 4,000 gallons of beer flowing at any one time. Photo: Yard House

The longest yard
Yard House is that opportunity, and it represents one of Darden Restaurants' best growth prospects.

Founded 20 years ago, as the craft beer revolution was just getting under way, Yard House has grown into a modest chain of 59 restaurants with more planned for the future. Of the 18 to 22 restaurants Darden will be opening this fiscal year, Yard House (and LongHorn Steakhouse) will comprise the bulk of them.

Darden acquired Yard House in 2012 for $585 million, and at the time, it only had 39 locations. Revenues at the chain were $124 million in the first quarter, up 12% from 2014, one of the strongest performances of any Darden concept except for Eddie V's and Seasons 52, understandable since both are smaller in size.

Yard House derives its name from a "yard" of beer, or a very tall glass used for drinking beer, and it generates half of Darden's division sales, a segment that also includes Seasons 52 and Bahama Breeze, a Caribbean-inspired chain. Segment profits surged 38% year-over-year, outpacing ever other concept.

The grass is greener
Earlier this summer, Nation's Restaurant News pegged Yard House as the sixth fastest-growing chain in the country, coming in at No. 91 in its top 100 restaurants of 2015. The industry site identified three key reasons why it has been such a success:

  • Restaurant growth -- the number of units increased 13.5% last year
  • Hot segment -- craft beer remains an industry growth vehicle
  • Vibrant atmosphere -- food, beer, and music combine to make a winning combination

These are all factors that combine to make Yard House the concept Darden Restaurants should be focusing on.

As big as a yard of beer, Darden Restaurants plans on making Yard House even bigger, expanding its footprint by at least a third. Photo: Yard House

Admittedly, the restaurant operator seems to have an embarrassment of riches at the moment. From Olive Garden to its two steakhouses -- LongHorn and The Capital Grille, a high-end eatery that is benefiting from the high-protein diet trend -- and the previously mentioned Eddie V's, Seasons 52, and Bahama Breeze, Darden is enjoying higher sales and profits across the board.

Naturally, Olive Garden is going to command a lot of the attention, because its footprint accounts for well over half of the total restaurants in the portfolio and the bulk of its revenues, but that doesn't mean Darden Restaurants should relegate Yard House to second-tier status.

As we've seen, that's fortunately not the case, but the biergarten's success thus far suggests it could stand to receive an even higher profile than it already enjoys. Yard House could be the restaurant that helps Darden Restaurants go the extra mile.

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