by Will Ashworth | July 20, 2012 10:00 am
Last October, I highlighted reasons Darden Restaurants (NYSE:DRI) was a much better buy than Yum! Brands (NYSE:YUM). What made it so attractive was the group of specialty restaurants it’s developing that includes The Capital Grille, Bahama Breeze, Seasons 52 and Eddie Vs, in addition to its three mature brands.
With bench strength second to none, Darden got even stronger on July 12 when it announced it was buying Yard House USA, a California-based operator of 39 high-volume restaurants emphasizing premium beer and handcrafted food. I liked Darden before the announcement. Now, I love it even more.
Darden paid 12.5 times EBITDA, about a 40% premium to recent dining transactions. However, BJ’s Restaurants (NASDAQ:BJRI), its bigger peer with revenues in 2011 that were a little more than double Darden’s, is trading at 14.3 times EBITDA on slightly slower growth.
Don’t get me wrong, BJ’s also has a good concept, but when you combine Darden’s operational and supply-chain efficiencies with Yard House’s strength at the bar, Darden has the potential to make this a billion-dollar brand within five years.
I’m not surprised that analysts — the price paid aside — have been very receptive on this acquisition in the short time it’s been public knowledge. This is going to be a home-run acquisition for shareholders. You shouldn’t be selling your stock anytime soon.
Yard House is different from BJ’s for several reasons. BJ’s focuses on making its own, award-winning draft beer, while Yard House offers a massive selection of other people’s products. While it does have a number of house beers, those are made by Firestone Walker in California and Brasserie de Silly in Belgium.
Yard House’s very first location in Long Beach has 167 beers and ciders on tap, including boring stuff like Budweiser and Coors Light. However, if you’re going to visit, order something interesting like Arrogant Bastard Ale from Stone Brewery or Purple Haze by Abita.
A second difference is Yard House’s day, which is more evenly spread between lunch, dinner, happy hour and late night. BJ’s mid-afternoon business accounts for just 13% of its day part, while at Yard House it’s more like 22%. People definitely are going to Yard House to enjoy a nice drink at the end of a hard day. Thirty-nine percent of its revenue comes from the sale of alcohol compared to 21% for BJ’s.
Finally, the third difference is the average check. At Yard House, its $20.43 per customer compared to $13 at BJ’s. As a result, the Yard House customer skews significantly higher in terms of income. Although beer is a main feature of both restaurants, the similarities end there. They’re two different concepts for two different customers.
Sensing Yard House’s big potential, Darden projects having between 150 and 200 restaurants by the time it’s fully built out. At the moment, it has 39 open with three under construction and another nine with leases signed or letters of intent on the table. That brings the total to 51.
Its most recent 10 openings have averaged first-year sales of $9.7 million per unit, giving the entire chain an $8.4 million-per-unit annual average. So, the current pipeline should produce $428 million in annual revenue. To get to $1 billion, Darden needs to open another 68 or thereabouts, with the possibility for as many as 81 additional units after achieving its goal.
At 200 units, its revenues would be approximately $1.6 billion, which is 75% higher than the specialty group’s current revenues of $959 million including Yard House. With Oliver Garden and Red Lobster virtually built out, this deal takes care of Darden’s growth concerns for at least the next two to three years.
If you’re a Darden shareholder and there’s a Yard House in your town, you should definitely head there to celebrate. This is a brilliant deal.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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