Darden Restaurants Inc.DRI

Morningstar Rating

Stock Research and Analysis

by R. J. Hottovy, CFA

Darden Restaurants has separated itself from other participants in the $70 billion casual dining market through its ability to manage profitable core brands while developing emergent concepts. Darden's mature brands--Olive Garden and Red Lobster--have Read more

Bulls Say

Olive Garden and Red Lobster have consistently outperformed the Knapp-Track industry same-restaurant sales benchmark, which we attribute to strong brand loyalty and an increasing emphasis on everyday value offerings.

Darden is well-positioned to gain market share from independent casual dining restaurants and smaller chains, which have struggled to remain profitable amid economic challenges.

LongHorn Steakhouse and The Capital Grille should benefit from Darden's brand management, supply chain, purchasing power, technology infrastructure, and restaurant development expertise.

The Seasons 52 concept, which specializes in meals that are lower in calories than comparable restaurant meals (typically less than 450 calories per entree) has solid returns on invested capital and intriguing growth prospects.

The firm has a history of using cash flow to augment shareholder value. Darden has repurchased 151 million shares for $2.91 billion since the inception of its buyback program in December 1995 and pays a quarterly dividend. Read more

Bears Say

Rising unemployment, tighter credit markets, and waning consumer confidence have led to a widespread decline in casual dining guest traffic. Many restaurants have turned to aggressive discounting to reverse this trend.

Driven by women entering the workforce and greater levels of discretionary income, the number of meals purchased at restaurants increased steadily through the 1980s and 90s. However, this trend reversed in 2000 and could worsen amid current economic woes.

During the next five years, the U.S. Census Bureau projects a moderation in growth among the 50-64-year-old population, a historically vital demographic for casual dining.

Darden has had mixed results with organically grown restaurant concepts. Bahama Breeze has struggled to achieve consistent returns, while China Coast and Smokey Bones were discontinued in 1995 and 2008, respectively.

The RARE Hospitality acquisition increased Darden's financial leverage, added integration risk, and could become a distraction in managing other brands. Read more

Strategy

Darden targets top-line growth of 7%-9% over a long-term horizon, composed of 5% unit growth, a 0.5%-1.5% increase in restaurant traffic, and a 1.5%-2.5% increase in guest checks. Olive Garden and LongHorn Read more

Management

Clarence Otis was appointed CEO in December 2004 and chairman in November 2005 after serving as the president of the discontinued Smokey Bones chain. We'd prefer the CEO and chairman roles be split to provide better corporate governance, but we haven't Read more

Profile

With a portfolio of almost 1,800 locations, Darden Restaurants is among the leading casual dining restaurant companies in North America. Olive Garden (695 units) and Red Read more

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