Can This Restaurant Stock Turn Around Disappointing Sales?
Jordan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Unless you're a restaurant critic for a local paper in a small North Dakota town, Olive Garden is just another worn out restaurant concept that's lasted far too long on free breadsticks, thin soups, and salads swimming in Italian dressing.
For a long time Darden's (NYSE: DRI) bread and butter was the casual customer. Olive Garden and Red Lobster concepts were the only places in between high-quality dining and mom and pop burger shops. They were neither expensive nor places of fine dining; they are restaurants of the middle class.
Recently, though, the fast casual concept seems to have taken steam from these two well-known names. Companies like Panera Bread (NASDAQ: PNRA), and Chipotle Mexican Grill (NYSE: CMG) are a step up from a burger, but not a place where you'll have to relearn what to do with a napkin upon sitting down.
How Darden plans to compete
A new menu at Olive Garden should help the brand reconnect with lost customers. It will focus on inexpensive meals and items with a lower calorie count, something not so easy with carb-heavy pasta meals.
Darden recognizes the need to work with a desire for a faster-paced experience. Chains like Panera Bread offer reasonably healthy choices at lower prices and at a pace the customer can choose. Olive Garden's sit-down approach may have to cut a few corners to make compromises.
While Darden may be down, it certainly isn't out. The company acquired a chain of restaurants known as Yard House in 2012, which the company hopes will present it with more growth opportunities in the future. Meanwhile, the company is also adding LongHorn Steakhouses and Bahama Breeze locations to its list of successful restaurants. Darden opened 32 new LongHorn Steakhouses in just the past year to up the concept's current total to 399 locations.
A value among other players
Investors seem to discount Darden's long-run potential for fixable problems at the flagship store Olive Garden. Yard House is an impressive growth story for the company, as it plans to grow the brand from 40 to 200 locations. The beer and spirits-centric operation that hauls in average revenue of $20.43 per person will be consistent with Darden's love of high operating margin restaurants.
All in, Darden will undoubtedly grow slower than Chipotle Mexican Grill or Panera Bread, but on a relative valuation basis, the company looks cheap. Darden Restaurants trades at 12 times forward earnings estimates compared to 20 times for Panera Bread and 25 times for Chipotle Mexican Grill.
Leverage differentials make Darden an even better value. It posts nearly identical returns on shareholder equity yet trades at only three times book value compared to Panera's 6 times book value and Chipotle's 8 times book value.
Darden's a value investor's pick. While Olive Garden is an aging concept, it's a consistent concept. Furthermore, up and coming concepts like Yard House presents Darden shareholders with a case for continued earnings growth. And let's not forget that while Darden may have hit a low point recently, the company still owns some of the best known brands in the space – brands now trading at a discount for all the opportunity in front of them.
valuemagnet has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, Darden Restaurants, and Panera Bread. 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!