Change is the essence of time. Darden needs to get with the times and change its strategy. If the current leadership will not, as seems to be the case, shareholders need to find a management team that will.
The lack of energy and confidence in the Darden management team’s presentation at the Barclays Conference was telling.
The highlight of this presentation was delivered before management began speaking. The moderator informed listeners that 74% of individuals in the room, according to a survey, did not own the stock. That was a bullish sign, but more confidence in management – or new management – is needed to get the stock going in the right direction.
The Multi-Brand Strategy’s Reign of Terror Continues
Listening to Brad Richmond speak today, it seems that not even Darden’s CFO now believes that the multi-brand strategy is an optimal path for his company. The company’s assets continue to be under-utilized and we do not expect that many of the 74% of people in the room that were not shareholders this morning have bought the stock hand over fist on the back of today’s presentation.
Here are our takeaways:
- The company can’t run 8 brands efficiently (EAT vs DRI Operating Margins)
- Growth is counter-productive when the current asset base needs to be better-utilized (see MCD and EAT for examples)
- The company is behind the times speaking about the “change in the competitive set” as if it happened last quarter
- Increased emphasis at Specialty Restaurant Group chains is ignoring elephant in the room – Olive Garden (How many of your problems that you ignored ever went away?)
- Increasing complexity of portfolio detracts capital and focus from core business , which is heavily laden with operational issues that need to be resolved
- A focus on turning existing Olive Garden stores around, not growing new ones, will grow shareholder value
- 4% unit growth is still too much in this industry, for this company’s brands
Here are our questions for management:
- Do you have any confidence in getting the Gap-to-Knapp positive again, for the Big Three brands?
- Do you need to cut capex further?
- Why are your operating margins 300 bps below Brinker’s when your AUV’s and restaurant level margins are higher? Surely SG&A must be out of synch with the business model.
Below, we show one of the most important chart for investors to see when pondering the ability of Darden’s management team to continue to pursue the multi-brand growth strategy:
$250 billion in EBITDA for $4 billion in Capex since the end of FY08! Shareholders, irrespective of how the stock has done, should view this as a serious offense on the part of management.
Howard Penney
Managing Director
Rory Green
Senior Analyst
