Darden Should Eat Its Own Cooking

It wisely tells others to close stores and then opens more.

What could help the struggling restaurant industry rebound? Close some restaurants, Darden CEO Gene Lee suggested Tuesday, bemoaning an oversupply of chains springing up across the U.S. in the past decade.

Hard to Stomach

Darden's shares are down 8% in the past 6 months, compared with a 5% gain in the S&P 500

Source: Bloomberg

But Lee's advice apparently doesn't apply to Darden, which operates Olive Garden and Longhorn Steakhouse restaurants. Darden plans to open 28 more restaurants this year and is on pace to increase its fleet of 1,500 restaurants by 2 percent to 3 percent per year over what it called "the long term," not including restaurants opened through joint ventures or franchising agreements. 

The seller of unlimited breadsticks should reconsider its growth plans. Now is not the time to build more restaurants. 

New unit growth among restaurant chains has outpaced population gains in the U.S. for years, boosting supply at a time when consumers are pulling back on restaurant spending, according to a recent presentation from research firm Hedgeye. 


Restaurant growth has been outpacing U.S. population growth, causing oversupply

Source: Hedgeye

Restaurant sales growth across the industry hasn't been positive since April, raising fears of an impending "restaurant recession." To keep customers coming in, chains are boosting discounts, even though labor and other costs are rising, and that's eating profits. 

Sales Crunch

This is what the start of a so-called restaurant recession looks like

Source: Bloomberg and MillerPulse

Meanwhile, consumers are increasingly dining at home, with food from grocery stores or meal-delivery kits from companies such as Blue Apron and Hello Fresh. Underscoring this shift in preference, Darden said to-go orders and catering rose by 20 percent in the latest quarter from a year earlier, making up 11 percent of sales.

Online sales help margins because they tend to be higher-priced orders and require less labor -- although they deprive Darden of check-boosting alcohol sales. Darden said it would keep pushing online ordering and that it was experimenting with delivery services. 

All of this argues for fewer eat-in locations, not more. If anything, Darden should think about acquiring established restaurants, rather than adding to the glut of new ones. 

Darden is in a position of strength relative to the rest of the industry after a successful activist campaign helped it cut costs, sell its Red Lobster chain, split off hundreds of locations into a real estate investment trust, and pay down debt.  On Tuesday it said sales at established locations rose by 1.3 percent in the latest quarter from the year before. It also announced a new $500 million share repurchase program and boosted its full-year earnings outlook. 

Darden's debt has fallen to less than 2 times Ebitdar 1 , below its long-term target of 2 to 2.5 times. The company has $114 million in cash and equivalents and a $750 million revolver -- all ammunition for scooping up struggling restaurant chains. 

And there are certainly plenty of targets: Don Pablo's and Garden Fresh Restaurants filed for bankruptcy on Tuesday, bringing the number of restaurant-chain bankruptcies in the past year or so to 10. Meanwhile, chains such as Ruby Tuesday, Buffalo Wild Wings, and Bloomin' Brands are struggling with slowing sales and traffic.

For Darden, it's time to eat or be eaten.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Earnings before interest, taxes, depreciation, amortization and rent

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net

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