DARDEN RESTAURANTS Martinsburg Team #2 Cameron Duffy Jeremy Reed Keith Whetsel Rhonda Baker
HISTORY • Nineteen-year-old Bill Darden entered the restaurant business in the late 1930s with a 25−seat luncheonette called the Green Frog in Waycross, Georgia. • Darden teamed with a group of investors in 1963 to buy an Orlando, Florida, restaurant, Gary's Duck Inn. • He decided to name the new chain Red Lobster • In 1970, when there were three Red Lobsters in operation and two under construction in Central Florida, General Mills bought the chain −− keeping Darden on to run it. • Rather than franchise the Red Lobster name, General Mills chose to develop the chain on its own. • General Mills decided to spin off the restaurant business as a public company in 1995 and focus on consumer foods. • The restaurants were renamed Darden Restaurants in honor of Bill Darden (who had died in 1994, the same year that Joe Lee was appointed CEO).
Overview • At more than 1,300 locations in the US and Canada, Florida based Darden is the leading operator of casual dining restaurants, including flagships Red Lobster and Olive Garden. • Red Lobster is the #1 seafood chain (about 650 units) • Olive Garden leads the Italian dining segment (about 540 outlets) • Both chains cater to families with mid-priced menu items, themed interiors, and primarily suburban locations. • Darden also operates a small chain of tropical-themed Bahama Breeze restaurants that offer Caribbean-inspired food, along with Smokey Bones BBQ, a growing chain of sports-themed barbeque joints. • Darden is testing a casual grill and wine bar concept called Seasons 52 that features a rotating menu of nutritious, "seasonally inspired" dishes.
Income Statement (Comparisons in Millions over the Trailing Twelve Months) DardenWendy’s Revenue $5109.1 $3635.4 Costs of Goods Sold 3962.42734.3 Gross Profit 1146.7 901.1 Gross Profit Margin 22.4% 25% Income Before Taxes 364.8 184 Income Taxes 116.7132 Net Income After Taxes 248.1 52 Tax Rate 32% 72% Net Income Profit Margin 4.9% 1.4%
More Income Statement (comparisons over the Trailing Twelve Months) DardenWendy’s Gross Profit as % COGS 29% 89% Operating Margin 7.9% 6.2% Return on Assets 8.6% 11.3% Return on Equity 19.1% 3.0% Darden uses its leverage to increase shareholder equity!
Balance Sheet (comparisons over the Trailing Twelve Months) Darden Wendy’s Current Ratio .48 .67 Debt to Equity 1.28 .86 Debt to Assets .56 .46 It’s not surprising that Darden is somewhat heavy with debt…they have no franchising.
More Balance Sheet Property, Plant and Equipment (In thousands, ending May 2004 Darden and January 2005 Wendy’s) DardenWendy’s Net PP&E $2,250,616 $2,349,820 Percent Consumed 40.4% 30.1% Percent Remaining 59.6% 69.9% Darden has recently relocated some of its restaurants to new facilities. Fiscal years 2003, 2002 and 2001 saw consumed PP&E of 38.7%, 38.8% and 38.1%. Are current values the threshold management has been seeking?
Efficiency (Trailing Twelve Month data) DardenWendy’s Average Days Supply 22.4 (13.3)* 10.3 Ending Days Supply 21.4 (17.9)* 10.5 Average Days to Collect 2.0 11.7 Ending Days Receivable 2.2 12.6 Cash to Cash Average 24.4 (15.6)* 22.1 Ending 23.6 (20.2)* 23.1 * Average of fiscal years 2002 through 2004
Analyzing Efficiency • Low Accounts Receivable = CASH • Of course the supply days are higher, they’re selling fine, aged wine, not frozen hamburger and potato shreds. • Darden keeps “cash to cash days” comparable to a fast-food joint.
Over-priced Stocks Stock Analysis over the Trailing Twelve Months DardenWendy’s Expected Growth Rate (Estimated) 10% %15 Current Earning Per Share (EPS) $1.48 $0.45 Present Value of Future Earnings $14.80 $6.75 Current Book Value Per Share $7.75 $15.14 Target Price Per Share $22.55 $21.89 Actual Price (As of April 06, 2005) $31.01 $38.86 Darden’s Actual Price = Book Value + 15.7(EPS) Overpriced Wendy’s Actual Price = Book Value + 52.7(EPS) Extremely Overpriced
MARKET DEVELOPMENT • Darden’s development of Smokey Bones Barbeque and Grill • 69 locations in 18 states • $174 million in sales FY2004 (3.2 million per restaurant) • 87% increase in sales for FY2004 • 30 locations added in FY2004 • Expansion will continue in FY2005 • Bahama Breeze restructure to improve profitability • 32 restaurant in 19 states • Closed 6 underperforming restaurants • $176 million in sales in FY2004 (5.2 million per restaurant) • 28% increase in sales from FY2003 • Seasons 52 concept restaurant • Opened in Orlando, Florida • Plans to open 2 or 3 new locations in FY2005
CONTINGENT LIABILITIES • Contingent liabilities for FY2004 were $21,532,000 (1.4% of total liabilities) • Contingent liabilities for FY 2003 were $19,910,000 (1.4% of total liabilities) • Contingent liabilities consist of credit in connection to purchase commitments, subsidiary obligations, worker’s compensation, general liabilities, contractual lease obligations, and other commercial commitments, plus third party sublease obligations. • 2 lawsuits involving employee labor disputes are stated • There are private lawsuits and claims Darden predicts these will have no adverse affect on financial position of operations and liquidity of the company.
Finger Food Claim Will Hurt Wendy’s • (CBS/AP) Sales have dropped sharply at Wendy's fast food restaurants in the area of northern California where a woman claimed she found part of a finger in a bowl of chili. • The big questions are: • “How much will Wendy’s have to pay for this incident?” • “As a potential investor, do I want to assume this risk for a stock that is already overpriced?”
Special Recipe. Rich. Meaty. • At Wendy’s, there’s always a pot of rich and meaty Chili simmering away. Their special recipe has been warming up Chili enthusiasts for many years, in fact, they’ve won their share of Chili cook-offs. And, did you know, their chili is low in fat and high in finger?
Why You Should Invest in Darden • Darden is a growing corporation that has successfully expanded without franchising. • Darden still has the option to franchise in order to increase growth. • Darden’s stock is not nearly as overpriced as Wendy’s. • Darden’s Net Income Profit Margin is nearly 4 times larger than Wendy’s. • Would you really feel safe investing in a company that literally can’t keep their fingers out of their chili?