Let’s look at Darden Restaurants, Inc. (NYSE:DRI)’s quarterly numbers. Same-restaurant sales increased only 1.1% at Olive Garden. Red Lobster did better with a 3.2% increase, and LongHorn Steakhouse managed a 3.5% increase. These results represented a rebound from earlier quarters, when the company’s brands fell behind the industry averages for same-restaurant sales growth. Fourth-quarter net earnings from continuing operations were $133.3 million, down from $151.6 million in the fourth quarter in 2012.
Olive Garden’s food and beverage expenses and labor expenses were higher on a percentage-of-sales basis than they were in the same quarter of 2012. G&A expenses were basically unchanged. The result: lower operating profit than the previous year. The story was exactly the same for Red Lobster. LongHorn Steakhouse experienced unchanged food and beverage expenses, higher labor costs and lower G&A expenses. The net result here was higher operating profit for the quarter.
Now, about the stocks…
When you look at these companies side-by-side, you clearly see the struggle to maintain a healthy pace of growth. Here’s how I would rank the stocks:
My second choice would be DineEquity Inc (NYSE:DIN). Evolving more into a franchise company makes great strategic sense. They will be able to operate leaner and deliver more earnings to shareholders. They are also unleashing the entrepreneurial spirit in their franchise operators which makes these managers more driven to succeed.
Regarding Darden Restaurants, Inc. (NYSE:DRI), my third choice, Olive Garden may be a brand that is nearing the maturity stage, despite the enduring appeal of free breadsticks.
I like Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH)’s the best of the three. Their niche market is willing to pay a premium for premium quality food. In most metro areas, there are a limited number of high-end steakhouses but a virtually endless number of family-style dining establishments. They expand their number of company-owned restaurants cautiously, with a sharp eye on that key metric, same restaurant sales growth. They are taking full advantage of franchise opportunities in foreign cities where the appetite for their steak house brand is strong.
In looking at each of these companies, keep an eye on the same-restaurant sales growth, not just total revenue growth. Restaurant chains can “buy” revenue growth by acquiring other chains, which can make the year-to-year revenue comparisons misleading.
The article Are Restaurant Chains Serving Up an Earnings Feast? originally appeared on Fool.com and is written by Brian Hill.
Brian Hill has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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