Little news of note has been emanating from Darden Restaurants' (NYSE: DRI) press office lately. Darden operates the popular full-service restaurant chains Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V's. For a company of this size, having no announcements about major rebranding or potential acquisitions creates a silence that is deafening. What's going on?
Long lines and strong sales
It appears Darden is taking a well-earned moment. The company's solid position is obvious from the long lines that face customers at its core brand locations. At Olive Garden, it took my family three tries over a period of three weeks to secure a table there. A departure time of 4:30 p.m. from our home finally met with success. Any later than that, and we instead rely on the online menu.
Image source: Darden Restaurants.
Darden's latest earnings announcement revealed mostly encouraging signs. Reported adjusted earnings per share of $1.76 showed an increase of almost 27% compared to year-end 2018. Total sales for the company increased 4.5% to $2.23 billion thanks to the opening of 39 new restaurants. LongHorn Steakhouse and the Capital Grille are sure assets with increases in sales of 2.4% and 3.3%, respectively. The latest acquisitions, however, are faring less well. Cheddar's Scratch Kitchen showed a decrease in sales of 3.2%, and Seasons 52 showed a decrease in sales of 2.1%.
With healthy income and nothing of note to deter optimism where growth is concerned, Darden's executives are perhaps wisely sitting back while the economy sorts itself out. The next year promises to be volatile as we head into a 2020 election, face the economic effects of the U.S.-China trade war, and hear news of slowdowns in the European economy that could start affecting the economy here.
Darden's debt load not a concern
Darden has few reasons to worry about its debt. As of May 2019, it was about $928 million. That figure had not risen significantly from the year before. With cash reserves of $457 million, it makes for a net debt of $470 million.
The balance sheet showed liabilities of $1.47 billion due within a year of May 2019 and $2.03 billion due after that. With cash of $457 million and receivables of $88 million due in 12 months, Darden's liabilities are almost $3 billion more than its cash and near-term receivables. With a market cap of $15.2 billion, this balance sheet should be totally manageable. Moreover, the company repurchased approximately $42 million of its outstanding common stock, which implies that it considers its stock undervalued.
Darden is striding confidently into 2020
There may be media quietness, but the company has provided a glimpse into 2020. Darden plans to open about 50 stores at a cost of around $240 million to $265 million. It also plans to spend between $210 million and $235 million on restaurant remodels, maintenance, technology, and other capital expenditures.
None of this can be considered a major strategy change for a company the size of Darden, and a further indicator of its current conservative approach is that it expects no acquisitions in the near future. While some might consider this a hindrance to growth, it could be a good thing. The performance of Cheddar's Scratch Kitchen, Yard House, Seasons 52, and Bahama Breeze, has been somewhat underwhelming and all have recently seen same-store sales decline.
Once bitten, twice shy. It seems that Darden Group has learned from its poor performance circa 2014. It is sensibly taming its desire for aggressive growth and focusing on its core strengths. A divestment where its weaker brands are concerned might be in the cards at some point. But, all in all, Darden has earned this breathing room considering its strong position in a competitive but growing restaurant sector.
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