Investing in restaurant stocks has similar pitfalls to buying equities in the retail industry; consumers are fickle and frequently flock to the hottest or newest store concept. And once they leave, it's hard to get them back. There is the occasional exception, which in the restaurant industry is Darden Restaurants (NYSE:DRI), as it has found a way to expand its primary concepts yet maintain sales and boost profits at its vast existing store base.
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Recent Trends
Sales increased 8% to just under $2 billion during the fourth quarter, as same-store sales from the three primary concepts fell a modest 1.4%. Negative comps were offset by a steady stream of new store openings that included 38 new Olive Gardens, 10 Red Lobsters, and 16 Longhorns. The smaller Capital Grille and Bahama Breeze concepts reported much worse comps, and saw only one store opening each.
Looking at the casual-dining competitive landscape, Ruby Tuesday (NYSE:RT) reported that fourth-quarter company-owned store comps fell 3.2% and franchised locations posted a 6.9% decline while Cracker Barrel (Nasdaq:CBRL) logged a 7.4% comparable decline during its most recent quarter. Comps at Ruth's Hospitality Group's (Nasdaq:RUTH) steakhouses fell a dramatic 23.4% during the firm's recently completed second quarter, slightly underperforming Capital Grille's most recent quarterly comp decline of 22.1%.
Full-year sales trends at Darden were similar, as overall sales increased 9% and comps fell 1.4% at the primary concepts. Darden stated that the casual-dining industry benchmark it tracks posted a comparable sales decline of 5.6%. Earnings from continuing operations increased 4% to $2.65, and included 10 cents in costs relating to merging the Longhorn Steakhouse and Capital Grille store bases that came from the purchase of RARE Hospitality in the fall of 2007.
Outlook
Darden sees full-year sales growth for fiscal 2010 between -1% and 1% on the opening of 50-55 new stores, and as same-store sales for the three primary chains should come in between -2% and flat. This is expected to boil down to earnings of $2.59-2.85 per diluted share, or at worst flat from the $2.59 reported in fiscal 2009, which excludes the impact of a 53rd week of operations, given when the fiscal years closes. (Read Can Earnings Guidance Accurately Predict The Future? to explore the controversy surrounding companies commenting on their forward looking expectations.)
The Bottom Line
At a current share price at around $34 per share, that places the 2010 forward P/E at about 12, which is at the low end of its five-year trading range. Its current dividend yield of 3% is above the market average of 1.58%, and was just increased by 25%. Sure, it's no longer growing gangbusters like Buffalo Wild Wings (Nasdaq:BWLD) and similar hot concepts, but the valuation is reasonable, and investors don't have to worry about when the music stops and diners hop to the seat of the newest trendy rival or leave its more staid store base completely. (See Sinking Your Teeth Into Restaurant Stocks to learn ways to analyze the restaurant sector)
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