Darden puts growth on its plate

Company to build business through acquisitions, dual-branded units and international expansion

While Darden Restaurants Inc. works to right the wobbly sales at its biggest brand, Olive Garden, the nation’s largest casual-dining operator is fortifying the rest of its portfolio through an aggressive multipronged growth strategy.

On tap are select acquisitions, such as the November purchase of the Eddie V’s upscale seafood brand; the expansion of its “synergy” sites, which co-brand Red Lobster and Olive Garden; and international development through franchise partners.

The strategy is projected to grow annual revenue between $3 billion and $4 billion in the next five years from the $7.53 billion generated in fiscal 2011, according to company officials. And officials expect Darden’s total unit count to rise by 520 restaurants, from 1,894 units in 2011 to 2,414 in 2016.

“As we look to the future, we see a company that is both more valuable and more valued,” Darden chief executive Clarence Otis said during the company’s annual shareholder meeting in September.

Darden’s growth strategy once included the in-house creation of such proprietary brands as Smokey Bones and China Coast, but since the 2007 purchase of Rare Hospitality, with its LongHorn Steakhouse and The Capital Grille brands, the company has been carefully shopping.

In November Darden acquired eight Eddie V’s Prime Seafood and three Wildfish Seafood Grille restaurants for $59 million, adding higher-end seafood restaurants to a vibrant Specialty Restaurant Group that also includes the Seasons 52, Bahama Breeze and Capital Grille brands.

Officials say they will remain selective in their buying decisions, focusing on concepts that complement those Darden already owns. 

“We’ve said if we find something that makes a good fit, then we would pursue it,” explained Rich Jeffers, Darden’s spokesman. “Our strategy is looking at acquisitions of proven brands with growth potential, and Eddie V’s certainly fits that bill.”

The strategy gets a nod from restaurant analysts. Bart Glenn, a senior research analyst with D.A. Davidson, said Eddie V’s is a logical fit for Darden.

“If you look at the concepts they have, Capital Grille is also a higher-end restaurant that also serves seafood,” Glenn said. “The newer Seasons 52 concept is a bit higher end. Although the bulk of their restaurants are in the mass-market casual-dining segment, they do have experience with upscale dining, although it’s a relatively small portion of their total portfolio.”

The Specialty Restaurant Group represented about 21 percent of Darden’s overall sales growth in the most recent quarter, ended Nov. 27.

“The group has made significant contributions,” Jeffers said. “In the second quarter, SRG did $137 million in sales, which was 19.1 percent higher over the previous [quarter]. And same-restaurant sales in that group were up 5.7 percent at Capital Grille, 0.5 percent at Bahama Breeze and 2.9 percent at Seasons 52.”

Jeffers added that over the long term, Darden expects the Specialty Restaurant Group to contribute 20 percent to 25 percent of the company’s annual sales growth.

Industrywide, higher-end, full-service dining showed strength in both 2010 and 2011.

A December research report by Jeffrey A. Bernstein of Barclay’s Capital noted, “The specialty segment has been the strongest comp performer, up mid-single digits, despite lapping similar strength in 2010, driven by continued resilience of the high-end consumer and very strong consumer demand. We expect such strength and industry leadership to continue, though likely at a decelerating rate as we move through 2012.”

Bernstein said the Barclay’s 2012 forecast for the specialty segment is for 4- to 5-percent growth, though Darden executives have said they expect their specialty restaurant group to see 6- to 7-percent gains during the year.

Ready to grow

Before the Eddie V’s deal, Darden’s last acquisition was in October 2007, when it bought Atlanta-based RARE Hospitality International Inc. for $1.19 billion, netting the 287-unit LongHorn Steakhouse and 28-unit Capital Grille chains.

The Eddie V’s deal, which closed in November, helps cut development and testing time, analyst Glenn said.

“I think finding something that has proven success in multiple markets and is going to be more scalable is an advantage,” Glenn said. “Whereas if they were to open one or two units on their own, it requires quite a bit of time to prove the concept.”

Darden said Eddie V’s, the first of which opened in 2000, comes with seasoned management and staff. 

“Not only will this help achieve a smooth transition and allow for consistently excellent execution during this period, but it also enhances the Specialty Restaurant Group’s overall operational talent base,” Eugene Lee, president of Darden’s Specialty Restaurant Group, said during a December call with analysts. 

New packaging

The company is also betting on its new “Synergy” units, where two brands share one roof and a kitchen. The first unit has been tested in Palm Coast, Fla., since March 2011. Darden plans to open two more in early 2012, Jeffers said.

The Synergy units offer Darden a “nontraditional growth method,” Jeffers said. 

“We’re looking at markets where that fits that general bill, and where we couldn’t have a stand-alone Red Lobster or a stand-alone Olive Garden,” Jeffers said.

“So far we’ve been pleased [with the results of the Synergy model],” Jeffers said.

Darden is also ramping up international growth with partners in Mexico and the Middle East.

In October 2010, the company announced its first area development agreement with American Group to develop and operate 60 Red Lobster, Olive Garden and LongHorn locations in the Middle East over a five-year period. In August 2011, Darden announced another agreement with CMR for 37 units in Mexico.

Analyst Glenn said expansion abroad is “a low-risk strategy, because they are not using their own capital. ... Given the appetite [abroad] for other casual-dining brands, I think they are likely to have quite a bit of success.”

Eye on Olive Garden

Still, the bulk of the company’s focus should be on regaining momentum at the core Olive Garden brand, Glenn said.

Although Darden had bucked the negative trends that ravaged much of the casual-dining segment in the past few years, in late 2011 the downturn took a toll on the 763-unit chain.

For the second quarter ended Nov. 27, 2011, Olive Garden’s U.S. same-store sales fell 2.5 percent, versus increases at Red Lobster and LongHorn. The disappointing sales, along with increased commodity costs, contributed to a 28-percent drop in Darden’s profit from the same year-earlier quarter.

For the quarter, Darden earned $53.7 million, or 40 cents a share, compared with $74.5 million, or 53 cents a share, in the same year-ago period. Sales rose 6.1 percent to $1.83 billion, from $1.73 billion in the same prior-year quarter.

Company officials pointed in December to the “persistent economic pressure” still affecting households with incomes of less than $50,000, a group Olive Garden had done well attracting throughout the Great Recession, and the need to improve Olive Garden’s “affordability” messaging.

In announcing second-quarter results, Drew Madsen, Darden’s president and chief operating officer, said the brand needed to narrow its “value-leadership” messaging while adding dishes with “slightly higher prices.”

“In hindsight, we did not evolve our guest experience and communication fast enough during the last couple years to stay fresh and relevant in they eyes of consumers,” he said.

Olive Garden’s momentum is crucial to Darden, Glenn added. 

“With that representing about half the profitability of the company, that’s the one that really moves the needle,” he said. 

Contact Ron Ruggless at [email protected] [3].
Follow him on Twitter: @RonRuggless [4].