In this article, let's take a look at Darden Restaurants, Inc. (DRI, Financial), the nation's largest casual dining restaurant company, which owns and operates more than 2,100 restaurants that generate over $8.5 billion in annual sales.
Past and Future
With the company´s well-known and strong brand recognition, and high-traffic on its locations, the firm has had healthy same-store sales as well as good levels of productivity. It has an interesting track record of being a leader when considering operating margins.
Last year, Darden has revealed plans to release its historical segment. Red Lobster, founded by William Darden in 1968, is the largest full-service dining seafood specialty restaurant operator in the United States, but is the worst performing segment. After considering several structures, a $2.1 billion deal was reached with Golden Gate. The divestiture of the Red Lobster segment will also help it to focus on its more profitable brands like LongHorn Steakhouse and Capital Grille. Further, competition has increased at Olive Garden. Looking forward, the restaurant must improve promotions and menu innovations in order to remain competitive in an environment with structural changes in casual dining. Moreover, operating cost reductions were planned and we think this should help the company to restore profitability.
Dividend Policy
Dividends have been paid since 1995, which demonstrates their commitment to returning capital to shareholders. Darden has raised its cash dividend in the past years. In 2007, it increased the annual dividend by 56% (to $0.72). In 2008, it further increased the dividend by 11% (to $0.80), in 2009 by 25% (to $1), in 2010 by 28% (to $1.28), in 2011 by 34% (to $1.72) and in 2012 by 16% (to $2.00). Last year, it announced a 10% increase to the actual level of $2.20.
Future Price Movement
According to Yahoo! Finance, the estimated one-year target share price is $50, so if you buy shares at current market price ($48.68), your return from price appreciation would be 2.7%. In addition, for holding the stock one year, you'll be paid a dividend of 55 cents per share each quarter, totalizing $2.20 at the end of the year, or a dividend yield of 4.5%. The total expected return for investing in Darden is 7.2%. We consider this is a low return and we can think in other stocks in the restaurants industry such as Red Robin Gourmet Burgers Inc. (RRGB) and Chipotle Mexican Grill, Inc. (CMG).
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 4.19%, but earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.14 vs $0.32).
The net income increased by 616.8% when compared to the same quarter one year prior, rising from $70.2 million to $503.2 million.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| DRI | Darden Restaurant | 34.13 |
| BKW | Burger King | 18.55 |
| YUM | Yum Brands | 63.92 |
| WEN | Wendy´s | 5.73 |
| EAT | Brinker International | 141.57 |
| Â | Industry Median | 10.04 |
The company has a current ROE of 34.13% which is higher than the industry median and the one exhibited by Burger King (BKW, Financial) and Wendy´s (WEN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Yum Brands (YUM, Financial) and Brinker International (EAT, Financial) could be the options.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 9.0x, trading at a discount compared to an average of 30.9x for the industry. To use another metric, its price-to-book ratio of 3.0x indicates a discount versus the industry average of 3.57x while the price-to-sales ratio of 1.1x is below the industry average of 1.51x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $17.635, which represents a 12% compound annual growth rate (CAGR).
Final Comment
It is possible that Darden could prove to be an attractive long-term investment. In my opinion, despite that during 2014, traffic at quick-serve restaurants was flat, now temperatures have warmed up and we should begin to see improvement.
The PE relative valuation and the return on equity that significantly exceeds the industry median make me feel bullish on this stock.
Hedge fund gurus have also been active in the company in the second quarter of 2014. Paul Tudor Jones (Trades, Portfolio) and David Dreman (Trades, Portfolio) have taken long positions on it.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
