Casual Dining, Darden's Hard Sell
While Darden persists on its road show, casual dining may not be an easy sell.
(Companies in this article: NYSE: DRI, Nasdaq: RUTH, Nasdaq: PFCB, Nasdaq: BNHNA, Nasdaq: CAKE, Nasdaq: APPB, NYSE: EAT)
In the beloved deep villages of Greece, goods salesmen travel via overloaded pickup trucks, touting their offerings over megaphone to inspire the convenient sale to the isolated townsfolk. Executives of Darden Restaurants (NYSE: DRI), the largest casual dining chain operator in the world based on FY 2007 (May) sales, may have a more difficult sale pitch to make in their travels, due to today’s competitive and potentially softening marketplace. The restaurateur is on its horn nonetheless.
If you call Darden’s corporate offices these days, as I did, you will find a scantily manned HQ. You see, much of Darden’s executive team is currently on a road show, promoting their new and improved strategy devised to overcome DRI’s growth challenge, despite its size burden. This is our take of Darden’s plan, and on the industry leader’s outlook, considering what we view as a challenging operating environment.
In its recent presentation at the CIBC World Markets 7th Annual Consumer Growth Conference, Darden appeared a company with a plan. Your author here, having seen the company present before and having carefully analyzed the stock long ago, while later profiting from its rise, views the current situation a bit less appealing.
The problem seems to be new concept identification, not execution…
Where Darden lays out a plan for growth that is keyed upon the faster pace of expansion of its leading concept, The Olive Garden, we see a plan driven by necessity not decision. In reviewing the presentation, we were struck by deja vu. Darden’s management, a well-respected group both within industry and among analysts, harps on patience when developing a new concept. We’ve heard that before… With development stumbles over the years involving a Chinese cuisine concept, and more recently, its Smokey Bones segment, we question the company’s skill in identifying winning ideas. By now, the operator of nearly 1,400 Olive Garden, Red Lobster, Bahama Breeze, Smokey Bones and Seasons 52 restaurants, should be able to make a new concept work if the idea is marketable.
Darden knows enough about operating a restaurant to manage the ins and outs. So when they come out and say they are planning to grow through further Olive Garden expansion, it seems to us that that’s only because there is no other choice. In May, DRI threw in the towel on Smokey Bones, closing 56 of the Bones Barbeque & Grill spots, with a plan to sell the other 73 properties. During this month’s presentation, management indicated that by the time it could work out “experience” and margin issues at Bahama Breeze, concept expansion wouldn’t ensue until FY 09. Nonetheless, DRI is currently building a property pipeline. The company’s latest restaurant idea, Seasons 52, is a higher ticket type outing, and the company sees its opportunity limited to only about 100 spots nationally.
Yeah sure…
Restaurants and retailers alike are notorious for estimating a certain market size, and then when it’s reached and the company becomes faced with the dilemma of what to do with capital, it is often revised higher. It seems Darden is no different. So, expect to see 40 new Olive Garden locations in FY 08, versus 32 in FY 07. Olive Garden was the company’s main engine in FY 07 also, as the segment grew sales 6.6% on 2.7% same-store growth. Darden expects a new point of sale system, an automated meal pacing system and menu and advertising changes to help continue same-store sales expansion this fiscal year.
Red Lobster, a cash cow yet seemingly endless renovation project, is undergoing another makeover. A new store prototype is being employed, and the company plans to later get around to putting the new look to its existing locations as well. Red Lobster is renovating its image also, with a focus on the freshness of its seafood offerings. The end goal is to maximize the seafood staple’s brand potential and improve same-store traffic. Red Lobster’s sales only rose 0.9% in the year just passed, and that included just a 0.2% contribution from same-store growth.
So maybe it’s time to buy a steakhouse?
The company enjoys the cash cow benefits of its broad Italian and seafood coverage. So, many investors would surely appreciate more dividends. The company has two clear uses in mind for its cash war chest. It plans to both pay more dividends and continue to seek growth. Some might argue that given its recent new concept success rate, or lack thereof, maybe Darden should accept the status of a mature business, and pay out its profits in the form of dividends. In fact, Darden increased its dividend by approximately 56% this past year, and during the Q&A session of its presentation, declared it would likely continue to boost dividends.
Still, executives the world over are not the type to just sort of sit on their steak filled rears, except perhaps in certain family owned operations that miss the benefit of activist shareholder inspiration. We believe Darden could pursue the purchase of a large concept outright. This shouldn’t be a surprise though, since the company mentioned it might do as much at the conference.
In fact, Darden could take on a large operation, and thus a more proven concept. DRI says they’re not beyond buying into an operation greater than 100 locations, as long as it has two-thirds of its market potential still open to it. With this in mind, we think there may be a steakhouse in Darden’s future. And wouldn’t you know it, Ruth’s Chris Steakhouse Inc. (Nasdaq: RUTH) has just the right number of stores at 107 owned and franchised. Return on invested capital is an important criterion for DRI, and RUTH’s ROE measures 40%, versus 32% at DRI, based on data from Capital IQ. As for growth, analysts surveyed by Thomson Financial forecast RUTH can grow EPS at a rate of 18% over the next five years. That would sure provide a boost to DRI’s projection for 10-12% in FY 08. Detractors might argue that the average ticket at RUTH’s steakhouse is too high to garner broad appeal. Hey, we’re just saying, it otherwise fits the bill…
Maybe Darden is hungry for Chinese again. P.F. Chang’s China Bistro (Nasdaq: PFCB) operates 152 Bistro units and 107 Pei Wei Asian Diner locations. As far as meeting the criteria, analysts see PFCB growing at an energizing 21% clip over the next five years. However, PFCB returns just 11% on equity, which does not seem like a fit. Returns are likely weighed down by Pei Wei though. Darden would probably spin off Pei Wei if it couldn’t fill the bill on ROIC, and Pei Wei offers a faster than casual dining type experience anyway.
Benihana Inc. (Nasdaq: BNHNA), on the other hand, may be made to order for DRI, with its less than 100 locations and an opportunity in Japanese cuisine. Benihana’s ROE is penalized by the fact that it does not carry any debt, financing growth via operating cash flow. However, its ROA at 8.0% still doesn’t meet up with DRI standards at 12.2%, but Darden benefits from a better-leveraged infrastructure due to economies of scale.
Darden is trying to please both worlds, and seems to have the luxury to do so. As management pointed out, the stock has returned 22% total return on average over the last ten years. The company’s shares have done okay this year, providing a 6.5% total return, and over 52 weeks, the shares are up some 27%. Even so, casual dining is coming under pressure recently, as investors worry about consumer spending patterns in light of expensive gasoline and other costs of living. Darden’s forecast for 7-9% overall casual dining chain store growth in the near term represents an increase over the last five years. However, it’s based on management’s expectation that employment will remain stable or improve, while inflation is driven lower. This analyst disagrees, seeing instead a weakening employment situation, which is in line with the Federal Reserve’s forecast, and persistent inflation, which is not.
As far as valuation goes, DRI trades like an industry leader.
Company -----------------Ticker ---- P/E ---- P/B
Darden Restaurants ------ DRI ------ 31X ---- 5.5X
Brinker International ----- EAT ----- 16 ------ 3.1
Applebee’s Int’l ---------- APPB ---- 29 ------ 3.6
Cheesecake Factory ------ CAKE ---- 24 ------ 3.4
While we think DRI has the right idea in consolidating its weaker segment operations at a challenging time, its industry outlook seems hopeful and valuation appears lofty for the environment we expect. Still, with its conservative growth nature and stable cash cow operations, the shares should remain a staple in many large mutual funds. That could help moderate cash outflows from its stock. Even so, we would steer clear of the chain, even if it looks to buy a steakhouse.
This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. (disclosure)
(Companies in this article: NYSE: DRI, Nasdaq: RUTH, Nasdaq: PFCB, Nasdaq: BNHNA, Nasdaq: CAKE, Nasdaq: APPB, NYSE: EAT)
In the beloved deep villages of Greece, goods salesmen travel via overloaded pickup trucks, touting their offerings over megaphone to inspire the convenient sale to the isolated townsfolk. Executives of Darden Restaurants (NYSE: DRI), the largest casual dining chain operator in the world based on FY 2007 (May) sales, may have a more difficult sale pitch to make in their travels, due to today’s competitive and potentially softening marketplace. The restaurateur is on its horn nonetheless.
If you call Darden’s corporate offices these days, as I did, you will find a scantily manned HQ. You see, much of Darden’s executive team is currently on a road show, promoting their new and improved strategy devised to overcome DRI’s growth challenge, despite its size burden. This is our take of Darden’s plan, and on the industry leader’s outlook, considering what we view as a challenging operating environment.
In its recent presentation at the CIBC World Markets 7th Annual Consumer Growth Conference, Darden appeared a company with a plan. Your author here, having seen the company present before and having carefully analyzed the stock long ago, while later profiting from its rise, views the current situation a bit less appealing.
The problem seems to be new concept identification, not execution…
Where Darden lays out a plan for growth that is keyed upon the faster pace of expansion of its leading concept, The Olive Garden, we see a plan driven by necessity not decision. In reviewing the presentation, we were struck by deja vu. Darden’s management, a well-respected group both within industry and among analysts, harps on patience when developing a new concept. We’ve heard that before… With development stumbles over the years involving a Chinese cuisine concept, and more recently, its Smokey Bones segment, we question the company’s skill in identifying winning ideas. By now, the operator of nearly 1,400 Olive Garden, Red Lobster, Bahama Breeze, Smokey Bones and Seasons 52 restaurants, should be able to make a new concept work if the idea is marketable.
Darden knows enough about operating a restaurant to manage the ins and outs. So when they come out and say they are planning to grow through further Olive Garden expansion, it seems to us that that’s only because there is no other choice. In May, DRI threw in the towel on Smokey Bones, closing 56 of the Bones Barbeque & Grill spots, with a plan to sell the other 73 properties. During this month’s presentation, management indicated that by the time it could work out “experience” and margin issues at Bahama Breeze, concept expansion wouldn’t ensue until FY 09. Nonetheless, DRI is currently building a property pipeline. The company’s latest restaurant idea, Seasons 52, is a higher ticket type outing, and the company sees its opportunity limited to only about 100 spots nationally.
Yeah sure…
Restaurants and retailers alike are notorious for estimating a certain market size, and then when it’s reached and the company becomes faced with the dilemma of what to do with capital, it is often revised higher. It seems Darden is no different. So, expect to see 40 new Olive Garden locations in FY 08, versus 32 in FY 07. Olive Garden was the company’s main engine in FY 07 also, as the segment grew sales 6.6% on 2.7% same-store growth. Darden expects a new point of sale system, an automated meal pacing system and menu and advertising changes to help continue same-store sales expansion this fiscal year.
Red Lobster, a cash cow yet seemingly endless renovation project, is undergoing another makeover. A new store prototype is being employed, and the company plans to later get around to putting the new look to its existing locations as well. Red Lobster is renovating its image also, with a focus on the freshness of its seafood offerings. The end goal is to maximize the seafood staple’s brand potential and improve same-store traffic. Red Lobster’s sales only rose 0.9% in the year just passed, and that included just a 0.2% contribution from same-store growth.
So maybe it’s time to buy a steakhouse?
The company enjoys the cash cow benefits of its broad Italian and seafood coverage. So, many investors would surely appreciate more dividends. The company has two clear uses in mind for its cash war chest. It plans to both pay more dividends and continue to seek growth. Some might argue that given its recent new concept success rate, or lack thereof, maybe Darden should accept the status of a mature business, and pay out its profits in the form of dividends. In fact, Darden increased its dividend by approximately 56% this past year, and during the Q&A session of its presentation, declared it would likely continue to boost dividends.
Still, executives the world over are not the type to just sort of sit on their steak filled rears, except perhaps in certain family owned operations that miss the benefit of activist shareholder inspiration. We believe Darden could pursue the purchase of a large concept outright. This shouldn’t be a surprise though, since the company mentioned it might do as much at the conference.
In fact, Darden could take on a large operation, and thus a more proven concept. DRI says they’re not beyond buying into an operation greater than 100 locations, as long as it has two-thirds of its market potential still open to it. With this in mind, we think there may be a steakhouse in Darden’s future. And wouldn’t you know it, Ruth’s Chris Steakhouse Inc. (Nasdaq: RUTH) has just the right number of stores at 107 owned and franchised. Return on invested capital is an important criterion for DRI, and RUTH’s ROE measures 40%, versus 32% at DRI, based on data from Capital IQ. As for growth, analysts surveyed by Thomson Financial forecast RUTH can grow EPS at a rate of 18% over the next five years. That would sure provide a boost to DRI’s projection for 10-12% in FY 08. Detractors might argue that the average ticket at RUTH’s steakhouse is too high to garner broad appeal. Hey, we’re just saying, it otherwise fits the bill…
Maybe Darden is hungry for Chinese again. P.F. Chang’s China Bistro (Nasdaq: PFCB) operates 152 Bistro units and 107 Pei Wei Asian Diner locations. As far as meeting the criteria, analysts see PFCB growing at an energizing 21% clip over the next five years. However, PFCB returns just 11% on equity, which does not seem like a fit. Returns are likely weighed down by Pei Wei though. Darden would probably spin off Pei Wei if it couldn’t fill the bill on ROIC, and Pei Wei offers a faster than casual dining type experience anyway.
Benihana Inc. (Nasdaq: BNHNA), on the other hand, may be made to order for DRI, with its less than 100 locations and an opportunity in Japanese cuisine. Benihana’s ROE is penalized by the fact that it does not carry any debt, financing growth via operating cash flow. However, its ROA at 8.0% still doesn’t meet up with DRI standards at 12.2%, but Darden benefits from a better-leveraged infrastructure due to economies of scale.
Darden is trying to please both worlds, and seems to have the luxury to do so. As management pointed out, the stock has returned 22% total return on average over the last ten years. The company’s shares have done okay this year, providing a 6.5% total return, and over 52 weeks, the shares are up some 27%. Even so, casual dining is coming under pressure recently, as investors worry about consumer spending patterns in light of expensive gasoline and other costs of living. Darden’s forecast for 7-9% overall casual dining chain store growth in the near term represents an increase over the last five years. However, it’s based on management’s expectation that employment will remain stable or improve, while inflation is driven lower. This analyst disagrees, seeing instead a weakening employment situation, which is in line with the Federal Reserve’s forecast, and persistent inflation, which is not.
As far as valuation goes, DRI trades like an industry leader.
Company -----------------Ticker ---- P/E ---- P/B
Darden Restaurants ------ DRI ------ 31X ---- 5.5X
Brinker International ----- EAT ----- 16 ------ 3.1
Applebee’s Int’l ---------- APPB ---- 29 ------ 3.6
Cheesecake Factory ------ CAKE ---- 24 ------ 3.4
While we think DRI has the right idea in consolidating its weaker segment operations at a challenging time, its industry outlook seems hopeful and valuation appears lofty for the environment we expect. Still, with its conservative growth nature and stable cash cow operations, the shares should remain a staple in many large mutual funds. That could help moderate cash outflows from its stock. Even so, we would steer clear of the chain, even if it looks to buy a steakhouse.
This article was initially published at Motley Fool. Wall Street Greek has the exclusive right to republish this article. (disclosure)
posted by The Greek | 6:14 PM
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