Darden Restaurants: Potential For Success

Jun. 7.13 | About: Darden Restaurants, (DRI)

Darden Restaurants, Inc.(NYSE:DRI) is a well run company. It benefits from its very good customer service, high employee satisfaction, and high-quality food. On the other hand, the company has an unimpressive balance sheet and operates in a saturated market. Even though the stock seems fairly priced, an investment in Darden is not for the faint-hearted. However, Darden can prove to be a good long-term purchase. The company has good business fundamentals and a long-term investor, with loads of patience, can reap riches from holding this stock.

Important Factors For Analysis

Business Model

Darden has built a very good business model. Darden offers good customer service, high-quality food and a good environment. In addition, its ability to advertise serves it well. Even though the restaurant industry seems saturated in the U.S., acquisitions and foreign expansion can and will help the company grow.

Darden's Restaurants is the world's largest full service restaurant company. It has built and owns successful restaurant brands such as Red Lobster and Olive Garden. And, it owns some premium restaurants that it acquired in the recent past, such as LongHorn Steakhouse and The Capital Grille. Overall, Darden has done a good job of building a reputation for high quality. In addition, it has earned a place in the reputed Fortune Magazine's "100 Best Companies To Work For" list. Such employee satisfaction is one of the company's greatest advantages over its competitors.

Darden's biggest competitive advantage is in its high-quality food with good customer service and a clean and comfortable environment. Darden competes with a range of restaurants, but its restaurants tend to offer better food choices and provide a better, more relaxed and urbane environment. As evidenced by the listing in Fortune magazine, higher employee satisfaction has led to a higher quality of service.

Another key advantage is Darden's ability to market its restaurants. It is the leading advertiser in the full size dining segment of the restaurant industry. The company uses all media such as local and cable television, digital advertising, billboards, search engine marketing, radio, and newspapers. In addition, Red Lobster introduced a television commercial in Spanish to attract the Hispanic populations. In addition to the advertisements, Darden frequently recreates its menu. For instance, Olive Garden introduced a "Dinner Today & Tomorrow" promotion, which gives customers two meals, one for the restaurant, and the other to take home, for the next day. This meal costs $12.95.

Another key competitive advantage with the company is its seafood purchasing capability. The restaurant sources top quality seafood of more than 100 varieties from around the world. Such interest in high quality and variety has resulted in long-term relationships with key seafood vendors. Since supply of certain seafood species is volatile, these long-term relationships with vendors help the company identify and purchase alternative seafood products and adjust their menus, as necessary.

Even though the market for restaurants seems saturated in the United States, the company has a future in making key acquisitions. In addition, the company has started to grow its presence abroad. In May 2012, there were 22 Red Lobster restaurants in Japan. In addition, the company has an agreement with an unaffiliated operator to open 60 new restaurants in the Middle East over the next few years. Such foreign expansion would compensate for the slow growth in the United States. In addition, acquisitions of other restaurants in the U.S. would also increase revenues.

Cash Reserves

Darden has a very weak cash position. Its current ratio is less than .5. With such a fragile financial condition, the company would find it difficult to make any significant acquisitions. This would have a serious impact on the company's ability to grow in the short term.

The long-term debt-to-equity ratio is slightly better, but nothing to rave about. It is slightly less than .8. Darden's financial condition leaves a lot to be desired.

Stock Price

The PE ratio(ttm) seems relatively low, but this is largely due to the market's low expectations from the stock in the short term. The company's earnings have grown at a less than spectacular rate in the recent past. The one silver lining in the company's stock is its high dividend yield, which was as high as 4% recently. However, considering the low current ratio, the dividend seems unsustainable. The company would eventually lower the dividend to fortify the balance sheet. In total, the stock seems fairly priced, with a currently high dividend yield.

Conclusion

Darden's stock is a 'BUY' for investors with a very long time horizon. The company has the potential to turn around its financial condition and start to grow in foreign markets. The stock should be purchased in a well diversified portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.