Darden Restaurants Continues Fine Dining Dominance With Newest Acquisition

| About: Darden Restaurants, (DRI)

Darden Restaurants (DRI) announced its acquisition of Yard House. The parent company of Red Lobster, Olive Garden, and other chains, bought Yard House for $585 million. Darden bought the upscale restaurant chain from TSG Consumer Partners LLC. The newly acquired company will become a part of Darden's Specialty Restaurant Group, consisting of Bahama Breeze, Seasons 52, Eddie V's, and The Capital Grille. The acquisition will give Darden a total of eight different restaurant concepts.

Yard House has 39 restaurants in 13 states. From the official press release," Yard House, which launched its first restaurant in 1996, offers contemporary American cuisine with chef-inspired recipes and ethnic flavors along with a wide range of draft beers and other beverages in a stylish and energetic setting."

The list of states with Yard House restaurants is:

· Arizona

· California

· Colorado

· Florida

· Georgia

· Hawaii

· Illinois

· Kansas

· Massachusetts

· Nevada

· New York

· Texas

· Virginia

Along with the 39 restaurants open, Yard House has deals to open six more locations through 2013. These new restaurants include expanding into four brand new states: North Carolina, Washington, Ohio, and Oregon. The company is very specific about locations, with the majority in large cities near sports stadiums or huge malls.

The deal represents another great opportunity for Darden to take a regional upscale brand and turn it into a national powerhouse. The average volume is $8.4 million at a Yard House restaurant. Darden Specialty Restaurant Group will welcome the addition of another chain that will make the Darden unit have over $1 billion in annual sales. By the end of 2013, Yard House will have 45 restaurants. Taking the average per unit, this brings annual sales to $378 million.

Full year sales by restaurant group:

  • Olive Garden: $3.58 billion
  • Red Lobster: $2.67 billion
  • Longhorn Steakhouse: $1.12 billion
  • Specialty Restaurant Group: $623 million

The new acquisition puts the Specialty Restaurant Group on pace for $1.01 billion in 2013 sales. In the company's five year plan, they had a goal of $1 billion in sales for their specialty unit. Now less than a year after that goal was laid out, it seems it will be happening very soon. Darden's five year plan was to have 2425 restaurants open, compared to 1894 at the time of the 2011 plan. This acquisition continues to strengthen the expansion plans.

Darden's earnings per share for the fiscal year will be negatively impacted by $0.03-$0.05 because of the acquisition. The newly acquired restaurant chain will impact earnings per share after fiscal 2013. Earnings per share were originally forecasted at $3.87-$4.01. New unofficial guidance would then place earnings per share at $3.82-$3.96. New price to earnings ratio for forward earnings are 12.5 to 13.0.

Taking the company's five year plan of 2016 earnings per share of $5.85-$7.35, you can see where shares might trade in four years. The midpoint range of that wide guidance is $6.60. Taking a price to earnings ratio of 13, multiplied by earnings per share would set up a price target of $85.80. This would set up for a 71% gain in share price in four years. However, with the new acquisition and increased expansion, Darden may be able to hit on the higher side of guidance. Earnings per share of $7.35 in 2016 would bring shares to $95.50, representing a four year gain of 91%. The gains do not include the 4% in dividend payments each year. Taking in aggressive expansion and growth on top of generous yields could make this a four year 100% gainer.

Darden also announced it would be lowering its share buyback amounts. The company lowered its previously announced $200 million in buybacks down to $50 million for the fiscal year.

Darden is growing through acquisitions. After building out and reaching close to full potential of Olive Garden and Red Lobster chains, the company saw the need to add to its portfolios. Darden is becoming what YUM Brands (YUM) is to fast food, in the sit down dining experience. I discussed the possibility of publicly traded companies stocking up on several restaurant concepts in an article about Buffalo Wild Wings (BWLD) actively shopping for new concepts to expand on.

I recommended buying shares of Darden after discussing their international expansion and growth through acquisitions in a previous article. A well laid out five year plan discussed how the Specialty Restaurant Group would be the fast growing segment. Shares will likely fall Friday morning on news of the acquisition. This could set up for the perfect time to buy into this well run sit down restaurant powerhouse.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DRI over the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Restaurants
Problem with this article? Please tell us. Disagree with this article? .