Why I'm Bullish on Darden

There is a new Red Lobster near my house. It's right next to a one year old Olive Garden. I drove by yesterday at 2:00 in the afternoon. Both had groups of people huddled outside with their little restaurant buzzers waiting on their tables. Both Olive Garden and Red Lobster are best of breed restaurant brands that have been around forever and are owned by the publicly traded company Darden Restaurants, Inc. (DRI).

So I'm bullish on Darden. Here's why.

Fundamental Reasons:

• There is still strong demand for their product.
• Their raw material and input costs are way down (food, fuel, labor).
• They are having no problem hiring people at no doubt competitive wages.
• They have highly recognizable brands that will survive the economic downturn and gain market share from weaker brands that will not survive.
• Its dividend is just under 3%.
• The dividend was raised 10% last Spring and it has stayed at that level through 3 quarterly payments.

Technical Reasons:

• It's been trending up since the lows of November without pulling back as much as the S&P 500.
• It's up around 3% year to date while the S&P 500 is down around 10%.
• The 10 day moving average is above the 30 day.
• It's forming the right side of a "cup and handle" pattern.

While I'm bullish on Darden, I've decided for the foreseeable future to hedge anything I buy with at least a 1/3 position in the SH (Inverse S&P 500 ETF). I'm also going to sell some out of the money calls against DRI since I expect it to go up, but I don't expect a huge pop. Here's a hypothetical plan....

• Buy 100 DRI at around $29 = $2,900
• Buy 13 shares of SH at around $77 = $1,000
• Sell 1 DRI April 35 call for around $85.

Disclosure - Long DRI and SH.

Comments

[Marcap:]

I do not agree that Darden is a good investment.

Darden profits (both gross and net) have been steadily declining over the past 4 quarters (a long time in the restaurant business), and its current liabilities now out-weight its current assets at a ratio of greater than 2:1 ($1.38 Billion in current liabilities vs only $565 Million in current assets).

And if that wasn't bad enough, Darden's A/P are now almost 2.5 times its combined Cash and A/R position (A/P at $456.2 Million vs only $184.4 Million in Cash + A/R).

Furthermore, a company which has to take on long term debt in order to be able to pay its dividends is not in very good shape to say the least. In my opinion, at $29.32 their shares are already way overpriced.

Feb 16 11:12 AM

[107Sid:]

DRI has other chains than Olive Garden and Red Lobster and their results are inhibiting growh. Darden should be able to take a lot of costs out of them, but that has perhaps already been reflected in the stock's move from the high teens just a few months ago. DRI is a solid longer term total return stock, but should rest and be a relatively dull stock over the next quarter or two.

Feb 16 11:46 AM

[AlanBike:]

After a 3 year hiatus, my family of 3 ate at Olive Gdn in Ventura, CA in January. We remembered it as very inexpensive and decent and fair---but not gourmet food. While prices, menu, wait and host staff were really good for this level of restaurant, we were shocked at how he food has degraded. Pizza crust and texture of ingredients were no better than the cheapo $2.95 supermarket brands. The bottomless salad bowl had only 1 small, mashed olive and only a few shreds of tomato. Chicken entre was really pathetic. Boxed wine is served along with all the ingredients that live in a can or vacuum freezer bag before "cooking." The cheapening of everything is unmistakable. However, judging by the mainly working-farming class clientele and parking lot full of beater cars, the food is probably good enough. The real investment play is probably for the microwave manufacturer. One can get a lot better even in this rural community, for the average $10 ticket here.

Feb 18 11:35 PM