DRI: THE UNTHINKABLE SHORT CASE

We held a call with clients on July 19th discussing our concerns about the long-term outlook for Darden’s stock.  We have written a longer - Black Book - that offers a comprehensive account of our thoughts on what we see as the most important factors affecting Darden’s financial health over the next three years.  Our view is that burgeoning growth in the company’s net units has masked some serious deficiencies in Darden’s two largest chains: Olive Garden and Red Lobster. 

 

The poor trends at Olive Garden and Red Lobster are pressing the company towards an impasse.  Specifically, the company is burning cash and the stock can no longer be all things to all investors.  A rich dividend, aggressive growth profile, and sturdy balance sheet have attracted investors of all different styles to buy Darden’s stock over the past few years.  One, or more, of these attributes is likely to fall away as maintaining all three becomes unsustainable.  A proactive reorganization, including a cessation or slowing of unit growth, would be preferable to the more likely reactive lowering of margins or slashing of the dividend that we think is becoming inevitable.

 

We have seen this movie before in the Restaurant Industry, and are advising clients to avoid Darden as a long-term buy idea until, at least, the facts change.

 

One of more daunting macro charts from the Black Book is the long-term trend in the population growth of the 55-64 YOA cohort.  The trend is decelerating and is set to continue decelerating for years to come.  This age group is a high-frequency customer within the industry, especially Red Lobster and Olive Garden. As Brinker CFO Guy Constant said at a recent conference: 

 

"What got you to win historically in casual dining was demographics in trade area and real estate. That's how you won. We all built many, many restaurants over many, many years and that's how you won. And in many ways we open the doors and they came because there were a lot of macroeconomic tailwinds who were contributing to that"

 

DRI: THE UNTHINKABLE SHORT CASE - 55 64 pop growth

 

This trend is not encouraging for a company that is focusing on growing the unit count of concepts not producing consistent guest count growth.  

 

Call me with any questions.

 

 

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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