Is This Company in Your Portfolio's Menu

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

Here, in this article I am going to write about America's that iconic chain restaurant that in 2012 managed to land itself on the FORTUNE  "100 Best Companies to Work For"  list for the second year in a row and is the only full-service restaurant company to ever appear on the list. Its restaurant brands - Red Lobster, Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's, and Yard House - reflect the rich diversity of those who dine with them. Yes, you are thinking right, I am talking about Darden restaurants.

The company has posted increasing profit for three quarters in a row, but couldn’t maintain the trend in this quarter; company executives blamed bad promotions, Hurricane Sandy, and purchasing its Yard House USA chain for the bad results.

Let’s talk about numbers

For the period ended November 25, Darden reported profits of $33.6 million, or 26 cents a share, down from $53.7 million, or 40 cents a share, in the year-ago period.  Sales rose to $1.96 billion, just above analysts’ predictions of $1.95 billion. The company’s quarterly revenue was up 7.0% on a year-over-year basis.  Selling, general, and administrative expenses were approximately 80 basis points higher than last year primarily due to the acquisition of Yard House.

The fiscal second-quarter profit fell 37% as same-restaurant sales at all three of its major chains sank, led by Olive Garden's (the company’s biggest chain by revenue) decline. Same-restaurant sales fell 3.2% at Olive Garden, followed by 2.7% at Red Lobster, and 0.8% at Longhorn. Those three chains combined posted a same-restaurant sales decline of 2.7%. While the current quarter same-restaurant sales were negative, but the company enjoyed strong success last year for both Red Lobster and LongHorn.

Let’s talk about competitors

One of Darden’s main competitors in the restaurants industry is Red Robin Gourmet Burgers (NASDAQ: RRGB). The board of directors has reauthorized a share repurchase program of up to $50 million worth of its common stock, which would be effective from January 1, 2013. Red Robin competes for both its workforce and clientele basis within this industry.  When a customer goes to Red Robin they know to expect huge, delicious tasting burgers that will not burn a hole in their pocket. In this holiday season, Red Robin greeted its customers with an exciting the Tropical Sunburn Tavern Style burger.

Other competitors are Kona Grill (NASDAQ: KONA) , Brinker International (NYSE: EAT), and Granite City Food & Brewery (NASDAQ: GCFB). For the third quarter, Kona reported EPS of 11 cents per share. The company estimates EPS of 9 cents per share on revenue of $23.1 million, for the fourth quarter. This American grill and sushi bar operated several strategies like offloading unprofitable locations, restaurant remodeling and promotions to survive in the market and increase traffics.

Brinker delivered 23% EPS growth for the fiscal first quarter 2012. The company’s quarterly revenue was up 2.3% on a year-over-year basis. Brinker International is one of the world's leading casual dining restaurant companies with market cap of $2.52 billion and P/E ratio of 18.2 times. Brinker has just two brands today, Chili’s and Maggiano’s Little Italy.

Granite City Food & Brewery, a casual dining group consists of: Granite City Food & Brewery and Cadillac Ranch All American Bar & Grill. The company reported strong performance in third quarter fiscal 2012 with 35.7% increase in total restaurant sales. It has a market cap of $16.9 million. The competing restaurants might offer better food choices that are higher quality or they could offer the same food but for better prices. 

Let’s talk about the future                 

Darden Restaurants has set its FY13 guidance at $3.29-3.49 EPS, which includes about 8 to 10 cents of transaction and closing costs for the purchase of Yard House USA Inc. Darden Restaurants, confirmed it won’t shift full-time employees to part-time status 2014 to save on health-insurance costs. It continues to expect to open approximately 100 to 110 net new restaurants in fiscal 2013.

Darden recently declared a quarterly dividend scheduled for February 1 representing $2.00 dividend on an annualized basis and a yield of 4.50%. Darden has been able to increase its dividend an impressive average of 23% over the last five years. 

Would you dine here?

Darden Restaurants has a 52-week low of $43.80 and a 52-week high of $57.93.  The company has a market cap of $6.03 billion and a P/E ratio of 12.84. Darden is struggling to find the right balance between focusing on low prices and quality of its food. In order to avoid hurting profit margins, Darden refrained itself from sales promotional activities to attract attention and increase traffics, unlike rivals.

The company needs to ration capital as cash flows appear tight and cash commitments are high. The financials suggests the company to look beyond promotions to regain momentum at their largest brands. While Darden’s dividend yield is attractive, the weak cash flow coverage and lack of future earnings visibility do not substantiate including this company in the portfolio's menu at this point of time.


sidhikharkia has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Red Robin Gourmet Burgers. 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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