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Darden Is a Leaner, Meaner Restaurant Stock Than Yum Brands

Inflation, reliance on China growth should worry YUM owners

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Specialty Retail

Darden’s three big brands — Olive Garden, Red Lobster and LongHorn Steakhouse — have 1,813 restaurants between them. In its first quarter ended Aug. 28, Red Lobster and LongHorn Steakhouse both had fantastic revenues growing same-store sales 10.7% and 4.8%, respectively. Olive Garden’s dropped 2.9%. It is the weak link in an otherwise strong lineup.

On Oct. 14, Darden announced it was paying $59 million for Eddie V’s Prime Seafood and the Wildfish Seafood Grille, two restaurant chains with 11 locations between them. It’s one more deal to beef up DRI’s specialty restaurant group that includes The Capital Grille, Bahama Breeze and Seasons 52. At the end of the first quarter, those three brands had 89 restaurants open, up from 77 at the end of the same quarter in 2010. Seasons 52, a once slow-growing brand, appears to be taking off. In the first quarter, the number of its restaurants open was 18, a 64% increase in one year.

Darden is building a strong bench that started with its acquisition of RARE Hospitality all the way back in 2007 for $1.4 billion. That deal added $1.1 billion in debt but brought with it LongHorn Steakhouse, the third leg of its mature brands segment, as well as The Capital Grille for its specialty restaurant segment. Its business is more diversified today than it was in 2007. One of the five specialty restaurants will step up and become the next Red Lobster or Olive Garden.

In the meantime, DRI also will focus on returning Olive Garden to positive same-store sales growth. Darden, like most restaurants, faces food cost increases that aren’t going away anytime soon. Fortunately, most of its restaurants are growing at a reasonable pace.

Bottom Line

Yum Brands’ enterprise value is 10.5 times EBITDA with a current dividend yield of 2.1% as of Oct. 24. Darden Restaurants, on the other hand, has an enterprise value of 7.6 times EBITDA with a dividend yield of 3.6%. An investment in Darden gives you a higher dividend payout, almost as much growth and not nearly the amount of risk.

As of this writing, Will Ashworth did not own a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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