Darden Restaurants (DRI, Financial) employs more than 150,000 people and through its subsidiaries owns and operates more than 1,500 restaurants. Darden provides meal experience at expensive prices versus the companies from the QSR and family restaurant segments.
For three good years, it was sailing through troubled waters with its stock underperforming the broader market, but has improved over the last one year, with gains of 24% versus around 11% of S&P500. So, it has indeed crawled out of troubled phase. The new CEO Eugene I. Lee had following to say during the third-quarter 2015 results:
My philosophy on running a great restaurant business is rooted in the fact we must have incredible focus and intensity around driving strong operating fundamentals. I like to call this getting back to basics. This means we're focused on culinary innovation and execution inside each of our brands, delivering attentive service to each and every one of our guests, and creating an engaging atmosphere inside our restaurants.
Three focal points and quarterly performance
- Darden plans to leverage its scale of operations to fuel competitive advantages in supply chain and G&A support, with the intention of improving value equation for its guests.
- Based on feedback collected from its significant guest and transactional databases it aims to enhance relationships with guests, and at the same time identify new opportunities to drive sales growth.
- Embrace the unique cultures and entrepreneurial spirit of its brands, while focusing on improving operating efficiencies and operating with a sense of urgency and inculcating a performance-driven culture.
Darden has moved ahead with these focal points for improving the operational results and the third quarter demonstrates that indeed this is working. However, a lot still needs to be done in order to successfully transition from an enterprise-centric operation to a nimble operations-focused restaurant company with benefits of scale and the spirits of a decentralized company.
Total sales from continuing operations were $1.73 billion which were 6.9% more than the year-ago period. This increase in revenue was on the back of blended same-restaurant sales for the company up 3.6% year-over-year. On the back of decent top-line performance, adjusted earnings came in at $0.99 per share, representing a year-over-year jump of 39%. The company had cut back drastically on marketing initiatives as it believed that it had over-spent on marketing to drive traffic.
Restructuring the real estate assets
Darden is evaluating a host of options for creating value for shareholder with its real estate, while also bolstering the credit metrics. For example, as a test case, the company listed 16 properties for triple net sale-leaseback. There was a great demand for these 16 properties and company listed 15 more after that. These properties will carry market appropriate rents and a workable lease agreement. The company recently listed its corporate headquarters building to explore different structures, including a sale-leaseback.
The proceeds from these sales are planned for repaying debt in order to improve credit profile of the company.
Outlook
During the fourth quarter, Darden expects same-store-sales at Olive Garden and Longhorn Steakhouse to be in the range of 1.5% - 2.5% and 4% - 5%, respectively. Specialty group is expected to hit a range of 2.5% - 3.5%. The company expects to add seven net new restaurants in the fourth quarter making it a total of 34 net new restaurants for the full fiscal year. Adjusted earnings per share for the fourth quarter are expected to be in the range of $0.91 to $0.94, representing a year-over-year growth of 69 %to 74%.
Going forward, over the long term we can expect earnings to grow as the debts are lowered.
Conclusion
Analysts expect a CAGR of 16% for next five years versus a decline of 11.64 during the preceding five years. However, with a strong rally in the last six months or so, the stock has become relatively expensive. The trailing P/E is at 11.98 and forward P/E is expected to be around 22. I would suggest waiting for the fourth quarter results before opening a position.
