Darden airs acquisition check list, and ‘franchisor’ could be on it

ORLANDO Darden Restaurants Inc. might be shopping soon for a restaurant chain in the 100-unit range, and the company has not ruled out candidates that franchise, according to analyst and press reports on the Red Lobster and Olive Garden parent’s annual investor conference here.

Attendees of the Thursday and Friday event said Darden chief executive Clarence Otis revealed under questioning that the casual-dining powerhouse would consider buying a midsized chain to maintain the company’s growth. The performance of homegrown startups has been mixed, with Seasons 52 generating high levels of traffic and sales, but Smokey Bones and Bahama Breeze continuing to struggle.

Otis said a suitable acquisition target would have a national presence, and that the company would not be opposed to buying a franchise brand. All of Darden’s current 1,440 restaurants are company operated, and the company prefers to own the land under its outlets as well. The company has not acquired a brand since it bought the Seafood Broiler group on the West Coast in the 1980s for conversion to Red Lobster units.

Officials also confirmed an earlier report on www.nrn.com [2] that the company will start converting units of its struggling Smokey Bones chain to a new grill concept called Rocky River Grillhouse. Attendees say the Smokey Bones units tagged for the changeover will likely be in the Southwest, the Atlantic seaboard north of Florida, and the Midwest, where the prototype is. The first Rocky River outlet, in a Cleveland suburb, has proven more popular with women than Smokey Bones has been, Darden officials were reported to have said. The brand was launched as a barbecue outlet, but Darden has dramatically altered the menu since then. News reports quote Smokey Bones president J.J. Buettgen as saying his charge generates $3.4 million per unit in Florida and other areas where barbecue is popular, but only $2.4 million per store in other areas.

Darden told analysts that same-store sales, although projected to increase between 2 percent and 4 percent in fiscal 2007, would eventually slow as flagship chains Olive Garden and Red Lobster continue to mature. An acquisition could help to foster growth. Darden bucked a trend in casual dining by saying it would accelerate rather than slow expansion. It told investors and analysts that it would step up development to about 70 restaurant openings per year, from a pace of about 45 annually.

In addition, the company said it would not leverage its balance sheet as many competitors are doing in order to buyback shares.