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With the Potential to Rise +37%, Darden (DRI) Should See
Renewed Buying Interest |
Published:
February 25, 2008
You
may not recognize the Darden name, but chances are you've eaten
at one of the firm's restaurants. Darden Restaurants (NYSE:
DRI, $31.38) owns the Red Lobster
and Olive Garden chains, both clear leaders in their respective
casual dining categories.
With a
relaxed atmosphere and a moderately priced menu, there is
often a waiting list to sample Olive Garden's Italian
cuisine. In fact, the chain has been a model of consistency
over the past decade, posting same-store sales gains for a
remarkable 53 consecutive quarters. As a result, the average
Olive Garden unit now rakes in almost $5 million in annual
sales.
Meanwhile, Red Lobster maintains a commanding
lead
in the seafood category. Almost 150 million guests visited a Red
Lobster location last year, and those diners have voted the
chain the nation's best seafood restaurant for 18 consecutive
years, according to Restaurants & Institutions magazine.
With mature restaurant chains, growth can sometimes be hard to
come by. However, management has done a good job of squeezing
more revenues out of its existing store base, even in a tough
operating climate that sees many diners eating out less. Over the
past four years, Darden has seen its annual sales climb from
$4.5 billion in fiscal 2003 to $5.5 billion in 2007. Meanwhile,
earnings from continuing operations have jumped +93% over the
same period to reach $2.53 per share.
And there is still room for further expansion. There are
currently about 1,300 Olive Garden and Red Lobster units in
operation throughout the U.S. and Canada, and management plans
to add dozens more this year. The addition of newer concepts
also has the potential to create a meaningful impact over the
next few years. While the firm's Smokey Bones barbecue
restaurants never picked up much traction (the chain was sold
last December for $80 million), others like Bahama Breeze and
Seasons 52 are still in the early growth stages.
Perhaps the biggest catalyst, though, is Darden's recent
acquisition of RARE hospitality, owner of LongHorn Steakhouse
and Capital Grille. With nearly 300 restaurants, LongHorn is
well on its way to becoming a national brand, and the purchase
gives Darden a firm foothold in the $13 billion steak segment --
almost as large as Italian and seafood combined.
Thanks in part to the acquisition, as well as continued organic
growth from the firm's flagship brands, revenues are expected to
rise +20% this year. And it's a safe bet that much of the
company's cash flows will continue to be funneled into stock
buybacks. Since 1995, Darden has repurchased 162 million shares,
and currently only has 143 million shares outstanding.
Like others in the casual dining space, Darden has been hit with
the double-whammy of rising food prices and lighter restaurant
traffic. And over the past couple months, the shares have
slipped from $40 to around $31. With that decline, the company
is now valued at just $4.5 billion -- about 70% of
this year's expected sales of $6.7 billion. And according to my
calculations, the shares have the potential to appreciate +37%
before reaching their fair value.
The current macroeconomic environment may remain tough for the
near future, but Olive Garden and Red Lobster are proven brands
that have made Darden the world's leading casual dining company.
Once the dark clouds lift, the shares should see renewed buying
interest.
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Nathan Slaughter
Editor
Half-Priced Stocks, The ETF Authority
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