Chipotle, which serves organic Mexican food, and Panera, which sells sandwiches, soup and salads, have blurred the lines between the two classifications and disrupted the market with a no-frills bistro dining experience. In other words, customers are getting higher quality food for a lower price without having to pay tips for the full dining experience.
A quick comparison of the top and bottom line growth of Chipotle Mexican Grill, Inc. (NYSE:CMG), Panera, McDonald’s, Yum! Brands, Inc. (NYSE:YUM) and Darden reveals the obvious shift in dining trends.
Simply put, people like the ‘pay at the counter’ approach to purchasing reasonably priced, healthier food – but it’s not a trend that Darden is completely oblivious to. Darden recently announced that it was testing the “Seaside Express” format at two Red Lobster locations, which use a ‘pay at the counter’ approach similar to its bistro rivals.
Although the concept is still experimental, it raises some interesting questions. Can Red Lobster re-brand itself as a no-frills bistro experience?
I believe the market has room for an affordable seafood bistro, which could offer unique fare such as seafood sandwiches, soups and salads. However, Darden also runs a high risk of cheapening its own brand and turning Red Lobster into the next Long John Silver’s.
However, investors shouldn’t get too excited about these baby steps. Although the company’s specialty restaurants show promise, its three main brands are simply losing their appeal in mainstream America.
Right now, Panera and Chipotle – which were built from the ground up to be disruptive – are winning the battle, as seen in the following fundamental comparison.
Although Darden appears to be a fairly undervalued stock at current levels, Chipotle and Panera are landing the blows where it counts – in margin growth and same-store sales. Although Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera are considered more expensive stocks, they deserve to trade at a premium due to more robust top and bottom line growth.
The Foolish Bottom Line
In fiscal 2013, Darden expects to earn $3.06 to $3.22 per share, in line with the analyst estimate for $3.16 per share. It forecasts revenue to rise 6% to 7% to $8.48 billion to $8.56 billion, also in line with the consensus estimate of $8.51 billion. In other words, it expects bland growth for the year ahead. However, bland and boring might be good for an income stock – Darden pays a quarterly dividend of $0.50 per share, a 4% yield at current prices.
In conclusion, there are simply better restaurant stocks out there than Darden. Darden is still trying to find itself, and it is heavily weighed down by the saturation of its three main brands. Customers in 2013 desire a more unique dining experience than a night at the Olive Garden – and that’s why the company will continue struggling in the foreseeable future.
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