Which Full-Service Restaurant Company Should You Buy?

Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Casual dining represents a great market in the United States. There have been many success stories of roadside eateries becoming giants because of their famous product offerings. The restaurant industry in the United States has leveraged its growth on the casual dining market.

As the population of United States becomes more multicultural consumers have started to demand different tastes. There is also a rising trend of quick service retail and fast casual restaurants which are targeting busy customers with standardized offerings. These companies are battling out for more casual dining market share with full-service restaurants.

Full-service restaurants are large chains of eateries that provide customized offerings with great ambiance and customer service. From a holistic view, full-service restaurants are losing their market share and are being replaced by quick service retail and fast casual restaurants. The competition among full-service restaurants is also increasing as the eroding traffic has fueled an intense market share battle. However, large full service restaurants, such as Brinker International (NYSE: EAT), Darden Restaurants (NYSE: DRI) and DineEquity (NYSE: DIN) are showing improvement in their performance.

Brinker’s promising strategies

Brinker owns, develops and franchises restaurants, primarily in the United States. The company owns two successful restaurant brands by the name of Chilis Grill & Bar and Maggiano’s Little Italy. Restaurants under the Chilis brand account for the major portion of the restaurants under the company’s control.

The company has largely been successful in meeting its 5-year growth plan that it carved out in 2010. For restaurants under the Chili's brand, the company re-thought the business model by giving better salary packages to employees and investing in the latest model ovens and other kitchen accessories. The company also modified its menu to include value-based items and initiated a guest-focused culture at its restaurants. The company also worked on re-imaging the interior and exterior of the Chili's restaurants. All of these activities made  guest satisfaction rate increase by over 4% on a Year over Year basis (Source: Company Presentation).  Guest satisfaction scores also improved at Maggiano’s little Italy restaurants by 3% on a Year over Year basis (Source: Company Presentation).

Brinker wants to continue its impressive growth and for that, the company has set new goals for itself. The highlight of the plan is the company’s goal to achieve 10-15% annual Earnings Per Share  growth and double Fiscal Year 2012 (FY12) EPS by FY17. For Chili's the company will continue its relentless focus on guest experience and food innovation. The company will also work for moderate restaurant growth and re-images. Brinker will also establish a TO.GO Chilis restaurant which will compete with the quick service retail and fast casual restaurants. The company has achieved its previously-set goals, and it has a solid future outlook.

DineEquity is not lagging behind either

DineEquity is one of the largest full-service restaurant companies in the world.

The company operates two restaurant concepts, Applebee's Neighborhood Grill and Bar (Applebee's) and International House of Pancakes (IHOP), with 99% of the company’s restaurants operated as franchises. This helps the company generate strong free cash flows; in addition to mitigating the pressure from commodity inflation.

The remaining company operated restaurants are used for test market purposes only. The company acquired Applebee’s in 2007 and since then, it has reduced its debt by more than US$ 1 billion. Its business model allows it to report significantly lower General & Administrative (G&A) expenses. The company is planning to grow its Applebee’s business by including healthier and low calorie meals in its menu. DineEquity is also planning to remodel Applebee’s stores to attract customers. IHOP, on the other hand, has launched a new interactive website and mobile app to facilitate its customers. The company’s efforts are commendable but they are not as great as what Brinker is doing.

Darden’s defensive stand

Darden owns and operates full service restaurants, primarily in the United States and Canada. The company has a number of restaurant chains in its portfolio, such as Red Lobster, LongHorn and Olive Garden.

Founded in 1968, Darden was the pioneer in the multi-brand casual business. The company has stated that its current portfolio of restaurants will continue its market share growth for the next decade. That is a tall claim especially when a company operates in an industry as dynamic as the restaurant industry.

Darden’s specialty restaurant group brands provide it with a broader overall guest and occasion base. The company is keeping its meals priced competitively by investing in lobster aquaculture. This will preserve Red Lobster’s ability to offer everyday price accessibility over the long-term. The individual attribute ratings for Red Lobster have gone up whereas they have been generally flat for LongHorn and down slightly for Olive Garden. Overall, the company’s management is planning to sustain its existing brands as a future growth strategy which makes me neutral about the future of the company.

The takeaway

Full-service restaurant companies have solid growth opportunities in the coming years if they plan out their strategies well. From my analysis, I believe that Brinker and DineEquity are focusing their efforts on growing further. These companies own established brands and due to their active planning and implementation, they will continue to benefit from rising revenues.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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