Return of the Restaurants?
Sky-high food and energy costs have done serious damage to much of the restaurant industry. But for the fittest who’ve survived, like Darden, this sector weakness is a chance expand and take market share.
Cramer offered up a slew of numbers to show just how bad things have gotten for casual dining: Steak & Ale filed for bankruptcy and is closing 300 locations. Standard & Poor’s lowered the credit ratings on Sbarro and Pizzeria Uno. Brinker sold its 80% stake in Macaroni Grill. Same-store sales dropped 2% in June, 4% in July, and August is expected to be weak as well. And these are just the big names. So imagine how the mom-and-pop spots are doing right now.
Now Cramer’s not saying that Darden totally escaped the damage done by inflation, a cash-strapped consumer and a recession-like economy. In fact, he called DRI a “sell” back at the end of June. Since then the restaurant manager pre-announced disappointing numbers for the quarter ending Aug. 26 and cut its full-year guidance. But now the stock’s down about $2 since Cramer’s June call, and he thinks there are some good reasons to take advantage of that discounted price.
Commodity prices have come down, both reducing Darden’s costs to do business and putting money back into the pockets of consumers. And even while costs were way up, Darden did much better than its rivals. So what you have is a company enjoying lower costs, less competition, consumers more willing to spend money and an overall better economic picture.
When the rest of the industry was contracting, Darden was expanding. And this is already the largest restaurant chain in the world, with 1,700 Olive Garden, Red Lobster, Longhorn Steakhouse, Capital Grille, Bahama Breeze and Seasons 52 locations. Darden just added 39 new Olive Gardens in fiscal 2008 – something the company hasn’t done since 1994 – and plans to add 75 to 80 new restaurants across the board in the first half of its 2009 fiscal year.
As for those higher costs, Darden followed the McDonald’s model and used its sheer size to manage the inflation. In July, wheat was up 37% year over year, tomatoes 19%, cheese 23% and potatoes 240%. Still, Darden expects its food costs to increase by only 2%.
Darden’s shareholder friendly, too. The dividend yield is 2.6%, and this $4 billion company’s bought back $1.5 billion in stock over the past five years. Another $220 million to $225 million worth should be repurchased in fiscal 2009.
So Darden’s outlook going forward seems to be much brighter than the reduced guidance the company offered. That’s why Cramer thinks there’s a good chance we’ll see a better-than-expected quarter next time around. And since Wall Street’s already given up on the stock, that gives you the opportunity to buy in now and profit from the pop that will come from that earnings beat.
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