Brinker and Darden Take Some Hits, Shares Up Anyway

Two interesting notes from the casual dining sector Friday, December 19.

First, Brinker International (EAT) announced to the relief of many that it was able to close its sale of its Macaroni Grill concept (80% interest, 220 units, for about $135M). The sale was at a loss, however, with EAT announcing a $35 to $40M loss that will be reflected next quarter. One surprising fact is that the sale value per restaurant (adjusted for the 80% factor) was only about $767K per unit. Wow--that's with restaurants that routinely average way north of $3M per unit in annual sales.

Then, Darden (DRI) lowered its future 2009 outlook on comparable sales to -2 to -4% (it was zero to minus 2, earlier), and noted that even with 53 weeks of sales (yep, that's an extra week), its adjusted, continuing EPS would be down 5 to 10% from prior year. It had a slighly better than expected November, due to a small increase in sales at Red Lobster and a rapid downtick in G&A expense.

The surprising thing is that both stocks did great Friday; EAT up 30%, DRI up 19.1%.

Sure, the credit market had been a disaster, and many doubts existed as to whether the Macaroni Grill transaction would close. At that price, the debt coverage ratios had to look right. But how can the market reward decreases in free cash flow and value? Perhps the moral of the lesson is: buy existing restaurants, don't build new ones!

Disclosure: no positions.

Comments

[Paul Price:]

In the current credit market conditions the driving force in equity pricing is the underlying company's ability to function without the need to re-finance or pay down principal over the next few years.

Darden is much healthier than Brinker in this view although the sale of Macaroni Grill [although at a reduced price] may help EAT weather the credit storm.

Both stocks got down to absurd lows as panicky sellers worried about survival rather than normalized valuations. At the dead lows DRI hit $13.21 or just 5.25x this year's redeuced EPS estikmate. EAT's nadir of $3.88 was less than 4x this year's already cut estimate of $1.01 [excluding the loss on the sale of Macaroni Grill].

Both stocks went up from there simply because they were unbelievably cheap if survivability was not in question.

2008 Dec 22 07:39 AM

[jepittman:]

An interesting alternative is to invest in the restaurant supplier. Sysco (SYY) is the 800lb gorilla in foodservice nationally and sports a 4% dividend. There is no liquidity trouble with SYY. They have earned close to a 30% return on equity (re Value Line) consistenty for years with lower than market volatility. Check out your favorite restaurant. Chances are good they at least have an account with a Sysco distributor. See http//:sysco.com

2008 Dec 23 09:30 PM