Darden Restaurants, Inc. (NYSE:DRI) has gone through a tough phase over the last few years, but it is looking forward to driving sales through menu changes at its top two brands, Olive Garden and Red Lobster. It is focused on increased value offerings at both brands and also promotion of these offerings through digital media. In unit expansion plans, it is planning to reduce capital expenditure this year across major brands. Darden is one of the highest yielding companies in the industry with a 4% dividend and will be returning more cash to its shareholders with the reduced capital expenditure this year. Let’s discuss these points in detail.
Menu changes will drive sales growth at Olive Garden and Red Lobster
Promotional offers with use of digital media are expected to attract customers
The company will promote its value offerings with value focused promotion across the brands. Olive Garden will be benefited by the re-introduced promotional offer “Dinner Today, Dinner Tonight,” which is a re-imaged “Buy One, Get One.” This new tagline reflects its value message effectively. At Red Lobsters, the “2 for $25 Seafood Feast” promotion will attract value-conscious customers. It has also enhanced the reach of its promotional offers with increased use of digital media. It provides free digital coupons and apps in the latter part of the promotional offers.
Reduced capital expenditure at Olive Garden and unit growth potential of Specialty Restaurant Group will drive growth
The management has reduced the capital expenditure for FY 2014 by 10% to $675 million. They will also reduce the pace of unit expansion and remodeling under the Olive Garden brand in this fiscal year. Store expansion will remain around 15 units, as compared to the estimated 30 units for the year. The company has huge cash flow potential with the self-funded Specialty Restaurant Group, including the Yard House brand, which is expected to take the group sales to the $1 billion mark. It has plans to add 150-170 restaurants over the next 4-5 years and drive growth in the long-term.
Peer Analysis
In casual dining restaurants, the other two major players that compete with Darden Restaurants, Inc. (NYSE:DRI) are Texas Roadhouse Inc (NASDAQ:TXRH) and Brinker International, Inc. (NYSE:EAT). Texas Roadhouse is a full service restaurant with 400 locations and plans to make that number 700-800 in the long term. It will increase its presence in two more states this year, representing 49 out of the 50 states. Overall, it will open 28 stores in this fiscal year, and 65% of the new stores will open in the second half of fiscal year 2013. Food inflation will continue to increase the cost of goods sold, especially beef; but it will try to offset this with 2%-3% menu price increases. It has reported same stores sales growth of 3.5% for the first quarter 2013, above the consensus estimate of 2.2%. It is expected to continue this sales growth with increased traffic and store growth this year.
Brinker International, Inc. (NYSE:EAT) is a single brand casual dining restaurant chain that competes with the multi-brand Darden Restaurants, Inc. (NYSE:DRI). It has taken several initiatives to achieve the target of a gross margin increase of 400 bps by 2015. It has introduced new kitchen technology to develop the “kitchen of the future” which has helped it to introduce new menu offerings of pizza and flatbread. It has also invested in the point of sale Ziosk Tabletop technology, which will enhance the customer experience and attract customers to its joints. Its remodeling program is also on track and is expected to complete 370 stores by the end of fiscal 2013. It is benefiting around 3% in same stores sales at stores where remodeling is over. All these initiatives are expected to drive long-term growth.
| Company | P/S ratio | Op. Margin | 1Yr. Fwd. P/E |
|---|---|---|---|
| Darden Restaurants | 0.78 | 9.42% | 17.05 |
| Texas Roadhouse | 1.19 | 10.61% | 18.69 |
| Brinker International | 0.97 | 10.68% | 15 |
Source: Google Finance and Yahoo Finance
Darden Restaurants has the lowest P/S ratio of 0.78 among its peers and moderate one year forward P/E ratio of 17.05. Texas Roadhouse Inc (NASDAQ:TXRH) has the highest P/S ratio of 1.19 and forward P/E of 18.69. Brinker International is performing the best in margins with 10.68% and with the lowest forward P/E of 15.
Conclusion
Darden Restaurants, Inc. (NYSE:DRI) is looking for a growth opportunity this year with menu changes. It is expected to increase sales growth through promotional offers with increased use of digital media. Store expansion across brands will help the company to increase sales growth in the long term. I believe its initiative for growth will be positive for the company. From the investment perspective, the company looks good. In addition to Darden, I will also recommend investors consider Brinker International for medium to long-term investment. I have discussed my bullish thesis on the company in my previous article here.
Ash Sharma has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Ash is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Value-Driven Menu Changes and Promotion Will Drive Sales Growth at This Company originally appeared on Fool.com and is written by Ash Sharma.
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