What Darden's Dismal Quarter Means for Everyone Else
Oct 14th 2013 3:31PM
Updated Oct 14th 2013 3:32PM
Darden is coming off of a really bad quarter. Net income plummeted a shocking 37% despite revenue increasing 6%. Although Longhorn's results were ok, the company's two flagships -- Red Lobster and Olive Garden -- continue to lose customers despite menu initiatives and an extensive restaurant remodel project.
In a previous article of mine I suggested that many full-service restaurant chains were going to continue losing customers as fast casual rises. I believed that Darden was one of the better-positioned players to take on this new challenge, and definitely didn't expect this big of an impact on the company.
So what does Darden's bad quarter mean for other players in the industry?
Falling comp sales
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Darden's comp sales -- and those all across the full-service restaurant industry -- are falling. Darden's revenue has continued to grow during this time, but this is almost completely due to new Longhorn locations and the company's acquisition of Yard House.
Keep in mind that Darden has one of the more diversified restaurant portfolios out there, something that keeps its results from looking as bad as it might look for other companies that are less diversified, such as Ruby Tuesday . When diversified companies take a big hit, expect non-diversified companies to be hit even harder.
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Ruby Tuesday began initiatives to "transform" its brand several quarters ago. With each quarter, management is quick to say that it is "confident" things will get turned around. What we've seen so far, though, is a situation that is deteriorating and making the company desperate. It's being forced to sell off it's property -- $26.1 million worth in the last quarter alone -- to make ends meet.
Given what we've seen, I'm watching two upcoming earnings reports with extreme interest: Brinker International and Bloomin' Brands .
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Brinker International is also experiencing slower guest traffic, but impressively grew its earnings per share 26% year-over-year. The company attributes a significant part of this growth to new menu items. Average prices have remained largely the same, yet several new menu items are more cost effective and therefore have a higher return.
Brinker's team has obviously done a great job in a tough economy, but I don't believe these menu items can deliver long-term EPS growth. Guest traffic ultimately needs to increase, something that management believes will happen in upcoming quarters. With other restaurants already reporting disappointing traffic, however, you have to wonder what Brinker's numbers will look like when it reports next week.
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One very diversified player to watch is Bloomin' Brands , home of Outback Steakhouse. Comp sales and guest traffic metrics have outperformed several peers for a couple quarters now, something that the company will look to continue.
Should guest traffic start to fall -- as it has with the majority of other full-service restaurants -- things could get a little tight. Bloomin's balance sheet doesn't look so hot with $1.45 billion in debt. This cost the company $31 million last quarter -- $13 million in repaid debt and $18 million in interest expenses.
I'm not suggesting that Bloomin' will be unable to meet its financial obligations. A decrease in restaurant traffic with an already very low profit margin could put a kink in growth plans, however -- and they are already slow. The company only increased its units 2% last year, and only looks to grow about 3% this year.
What to do
Keep an eye on Brinker and Bloomin's upcoming earnings reports. Specifically with Brinker, look to see if the company can begin to boost its guest traffic. With Bloomin', look to see if its comp sales begin to feel the pressure that its competitors have felt. I don't hold the crystal ball, but my hunch is both of these companies are going to be adversely affected by what we've seen in the industry.
Darden clearly has the financial muscle to keep paying out dividends, even during tough times. It opted to keep its dividend steady even with a huge drop in earnings. Darden is still a good option if you're looking for a dividend play, though the company's stock had a better entry point right after the drop resulting from its earnings report. It's currently sitting back where it was pre-earnings report.
If you're looking for hot growth, however, I think there are many new fast casual plays that can give you more of what you're looking for.
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The article What Darden's Dismal Quarter Means for Everyone Else originally appeared on Fool.com.Jon Quast has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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