RUTH is a rounding error
The accretion to Diluted 2024 EPS is $0.10-$0.12 cents (excluding acquisition and integration-related expenses) is about 1%
As of last night's close, DRI's enterprise value was $19.1 billion. The acquisition of Ruth's Hospitality Group for $715 million will not change the growth profile of DRI. According to the company, the acquisition will allow DRI to add more upmarket eateries to its portfolio and solidify its elite steakhouse market position. Ruth's Chris Steak House is a chain of upmarket steakhouses with more than 140 locations globally, including 80 company-owned or -operated restaurants and 74 franchised restaurants, generating systemwide sales of over $860 million, total revenues of over $500 million, and average annual restaurant volumes for company-owned or -operated locations of $6.2 million in 2022. With the acquisition, Darden will have access to the sizable customer base (how many customers go to DRI's current portfolio?) and location network of Ruth's Chris Steak House. DRI already operates other upmarket brands like Eddie V's and The Capital Grille, which are competitors of RUTH. How do RUTH's franchisees feel about this?
The purchase is part of a trend that DRI sees shifting consumer tastes in the restaurant sector. Darden's acquisition of Ruth's Hospitality Group will put the business in a position to meet this demand and maintain its industry competitiveness as customers increasingly seek out upscale dining experiences. Furthermore, Darden anticipates significant cost synergies from the acquisition. Darden can streamline Ruth's Chris Steak House's operations, increase efficiency, and save costs by drawing on its current infrastructure and operational know-how. Darden expects pre-tax synergies of between $5 and $10 million within the first year and between $15 and $20 million in the second year. Total acquisition and integration-related expenses are expected to be approximately $55 to $60 million. The acquisition is expected to accrue to Darden's diluted net earnings per share in the fiscal year 2024 by approximately $0.10-$0.12, excluding acquisition and integration-related expenses. Overall, Darden Restaurants made a wise strategic choice by buying Ruth's Hospitality Group.
COCO, a Play on Functional Beverages
COCO doubled EPS estimates for the first quarter and raised full-year forecasts for 2023 COCO 1Q23 GAAP EPS of $0.12 beats by $0.06. Revenue of $109.8M (+13.8% Y/Y) beats by $5.86M.
In the consumable space between @Hedgeye_Staples and myself, we cover three names participating in the Functional Beverages space (COCO, CELH, BROS). Functional Beverages Non-alcoholic drinks that fall under the category of functional beverages are those that aim to offer more health advantages than just hydration. To assist particular health functions, such as boosting energy, enhancing digestion, or lowering stress, these drinks frequently have additional substances like vitamins, minerals, probiotics, or other supplements. examples of functional drinks include Kombucha, Matcha Coconut water, Turmeric drinks, CBD drinks, Aloe Vera drinks, and Adaptogenic drinks.
COCO was a busted IPO in 202 that is getting its footing back. The company priced its IPO on Oct. 20, 2021, at $15 or $3 below the bottom of its $18-to-$21 price range and hit a low of $7. COCO is seeing strong volume growth accelerating in 2023 with 1Q23 volume growth accelerating from 5.5% in 4Q22 to 8.3% and revenue per case accelerated from 0.7% to 5.1%. This performance was achieved against a very strong 1Q22, where Vita Coco Coconut Water net sales grew 38%. In the Americas 1Q23, Vita Coco Coconut Water net sales grew 17%, including 15% volume growth and single-digit contribution from price.
Gross profit was $34 million for the 1Q23, compared to $19 million last year and Gross margin was to 30.7% compared to 19.8% last year. As of March 31, 2023, the Company had cash and cash equivalents of $29 million and no debt under a revolving credit facility, compared to $20 million and zero debt, respectively, as of December 31, 2022. The increase in net cash was primarily driven by the increase in net income. Inventories as of March 31, 2023, totaled $64 million down from $84 million as of December 31, 2022.
“Gross margins for the quarter were slightly better than expected due to cost efficiencies in domestic transportation, and this makes us even more comfortable with our full year gross margin guidance based on the current cost environment and pricing actions already executed. As gross margins return closer to historical levels, we are able to invest more heavily in both our brands and organization for the balance of the year to remain well-positioned for long-term sustainable growth and profitability. Based on the health of our Vita Coco brand and progress to date on our key 2023 commercial initiatives, we are raising our full year net sales growth and Adjusted EBITDA guidance.”
Management now expects net sales growth of approximately 9% to 12% as compared to fiscal year 2022, raised from a previous 9% to 11% forecast and we see upside to theses numbers. Vita Coco Coconut Water is expected to grow mid-teens and Private Label net sales are anticipated to be slightly positive. Adjusted EBITDA is forecast to be in the range of $54M to $59M, up from $52M to $58M anticipated in prior guidance. Full year gross margin is expected to be between 32% and 34% due to lower transportation costs, higher prices, and easing supply chain bottlenecks.
Its down hill from Here
A nothing quarter
IHOP and Applebee's experienced comp sales growth in the first quarter, with increases of 8.7% and 6.1%, respectively, but consolidated adjusted EBITDA only grew to $66.3 million versus $65.2 million. After the quarter ended, DIN completed a $500 million refinancing of the senior secured notes due in June 2024, resulting in a $200 million debt reduction. The company discussed a previously resilient customer base that may feel the effects of economic uncertainty and the need for value. Applebee's is knowns as a lower-income concept, and the company tried to dispel that characterization with some "new discoveries."
The new discoveries from the CEO come "After doing in-depth research to refresh our knowledge of the Applebee's guest profile, we just discovered."
- "We are now serving more desirable 18 to 34-year-old guests than we were prior to the epidemic, as well as more guests with children."
- "Compared to 2019, we are seeing more guests with household incomes of $100,000 or more. Compared to 2019, the diversity of our visitors has increased."
- The spin on discounting was creative "Additionally, our deal-based dining attracts and retains more of our target customers because it is highly motivating to them." And that last piece of information, in particular, impacts Applebee's marketing and strategy, suggesting more discounting.
In 2H22, DIN anticipates that the cost of goods will continue to moderate; coffee, eggs, and poultry costs were lower in 1Q23, while beef and wheat prices are still high. DIN and other reporting staffing levels in 1Q23 are improving, but filling late-night shifts is still tricky. On Fuzzy's, the company inherited a pipeline of 125 new units and will utilize the platform to grow the brand as existing IHOP and Applebee's franchisees are showing interest. Lastly, the mention of ghost kitchens on the call was three, down from eleven in May 2022. I guess that strategy has died.
