Darden Restaurants, Inc. is an American restaurant consisting of various brands whose headquarter is located in Orlando. The company operates several brands in the United States including Olive Garden, Bahama Breeze, LongHorn Steakhouse, Season 52, Wildfish Seafood Grille, The Capital Grill, Eddie V’s Prime Seafood, and Yard House. The company used to own Red Lobster up until the year 2014 where the business changed hands. Darden had 1534 create and restaurants locations owned and operated by the company and spread in both the United States and Canada. All the restaurants were owned and managed by the firm with exception three restaurants in California, and Florida that are jointly owned but run by Darden. Another franchised restaurant in Detroit, one franchised restaurant in Atlanta, plus eight other franchised restaurants in Puerto Rico that are owned and operated jointly by third parties. The company has plans that have already kicked off expansion programs to the Middle East, and som South American countries. In this paper, we shall carry out a detailed analysis of Darden Restaurant including future returns, outlooks, SWOT analysis, risk assessment, and company valuation.
Company Mission and Vision Statement
The company mission is a financial success through consistency of the people delivering outstanding food, drinks, and services in an inviting environment. This pulls and creates a list of royal guests. The company vision is to support the best in-class-restaurant brands thus, helping them rich the full potential by leveraging on the scale insights and the acquired experience.
Products and Company History
Darden restaurant offers full dining services through various brands operating in different locations. The company also provides dining gift cards that can be extended to friends and relatives on special occasions. The company origin could be traced back to 1938 when William (Bill) Darden in Georgia. Later, he founded Red Lobster Inns of America opening the first restaurant under that brand. Darden was experimenting how a seafood restaurant would fare in a noncoastal region. Two years later, the chain had already started to pick, and he already owned three other restaurants in different parts of the region. However, owing to the limitations in the finances, Red Lobster was thus sold to General Mills. General Mills was able to upgrade the chain to casual dining/family-oriented brand, they opened a new headquarter in Orlando and retained Darden as the company manager, and later he rose to the position of the president of Red Lobster. Ten years after his ascent to the president, the company had opened about 400 new branches. The company underwent various transformations and restructuring and managed to lower the prices and dominate the market as a casual dining restaurant.
In the year 1982, the company embarked on a new road to various branded restaurants and opened its first Olive Garden in Orlando. Seven years down the line, the chain had expanded and had already opened additional 145 stores making it the fastest growing restaurant holdings. In spite of the fact that the success did not meet the expectations, the chain grew in popularity, and the sales matched those of Red Lobster and became the leading restaurant to offer full Italian theme in the United States. In 1995, the company opted to shift its business focus to consumer food products were renamed as Darden restaurant. The company expanded its operations both in the local market and as well in the international market including Canada, South America and Asia (Darden Restaurant).
Further Expansion Programs
The company (Darden Restaurant) shares were issued in the New York Stock Exchange (NYSE) on May 9, 1995, at $9.75 per share. The company plan was to add several other chains to its franchise, and that effort led to the creation of the Caribbean theme in 1996. The company has faced some hard times such as 1997 closure of 48 stores resulting in a retrenchment costs of $91 million. The company recovered quickly from the shock making profit in the year 1998 and opened other stores in 1999. Season 52 was inaugurated in 2003; in January 2007, the company continued with its expansion strategy and was in the process of purchasing another one hundred stores. The company sold Smoky Bones and acquired the rival company Rare Hospitality for $1.4 billion. In the year 2010, season 52 was ready to start its expansion program and was able to open up additional 11 stores. In 2011, the company rolled off its franchising model of business. The company then opened up other specialty brands to serve different market categories. In 2012, Darden purchased Yard House and prominent investors such as Starboard value came in increasing the company shares' value by 3%. In 2014, Starboard challenged the existing board policies including the sale of the Red Lobster at $2.1 billion terming it as gross undervaluation. The Board was then replaced in the then upcoming elections.
Outlook for Future Products
Currently, the company services fall under the full-service segment. In spite of competition from mostly smaller players, the company has managed to build a strong brand that will differentiate from the rest and drive sales. The company also boasts of having a strong experience and expertise, operational excellence, supply chain and talent management in the restaurant industry and hopes to leverage this to boost its sales. Darden restaurant hopes to increase its level earnings through increased sales volumes and increased customer spending on their restaurants. In the year 2016, the company expects the sales figures to grow by between 2.0% t 2.5% from the previous year value. The company also expects to open between 18-22 new stores in the 2016 fiscal year and the fiscal expenditure in the creation of the new restaurant. In June 2015, the company announced a $0.55 translating to a full year dividend of $2.20.
Financial Performance
The company has continued its growth path in the last financial year. In the past fiscal year, the company sales grew by 7.6% compared to the previous year period which was by 6.2%. Besides the improved sales figures, Darden Restaurant was able to slow down the rate of increase of the operating costs from the previous year increase of 8.3% to the current period increase 7.0%. The net earnings grew by 147.9%.
The company numbers of the restaurants as at May 31, 2015.
Marketing and Promotion
Darden restaurant is the world largest full-service restaurant. The company prides itself in its ability to offer good quality products at lower costs. Most of the advertising are done through the traditional media. The company full services targets families and thus they have to promote their services in media platforms that appeal to the target market. The company has managed to maintain a steady growth owing to their continuous advertising and multiple brands that target various market segments (Chen).
SWOT Analysis
Below is a SWOT analysis for Darden Restaurants
Strengths
One of the major strength of the company is the diverse products that are available in the different stores. Customers have a diverse variety of choices to choose from thus accommodating a broad spectrum of clients. The company chains carry some of the strongest brands in the full-service market category. There are no franchises in most cases thus allowing the company freedom to direct their menus.
Weaknesses
The leading company operations are in the United States plus some selected states in South America and Asia. Thus, the company lacks global presence, and thus it is likely to be affected by changes in the economic conditions of the region that it operates in. The fact that the company is not a franchise is a disadvantage in the essence that the business has to meet all the overhead cost that is incurred by alone.
Opportunities
One notable practice in the marketing and promotion is the fact that the focus company platform for the commercialization is the traditional media. The company can boost its brand and customer base through digital marketing especially social media. The company can continue with the acquisition and continue to create more value for the customers. Darden Restaurant can tap into the real estate market as the prices in most places are low.
Threats
The company operation is in different parts of the world exposes it to forex fluctuations. Also, since the hotel supplies are acquired on a daily basis, they are prone to inflation. This cost in some cases cannot be passed down the customers as the management seeks global leadership in their brands.
The above analysis depicts the competitive strategies of Darden Restaurant. The company can optimize on its strengths and harness the available opportunities while reducing the potential impacts of the available threats and weaknesses.
Future Strategies
The future business strategies should be pegged on the customer trends to ensure that it remains competitive on the long run. The restaurant industry is complex with diverse forces at work and competition strategies at play. Most of the large chains have specialized in certain signature dishes and strives to excel in that particular line. They have a single brand that they strive to build. However, Darden Restaurant approach is different. There are multi-brand stores and the food products served in these stores are diverse. This makes the company strive regarding brand strategy.
Valuation Analysis
The company shares closed at 64.98 on April 8, 2016, with 100,532 shares traded on that day. The company has a market capitalization of $8.21 billion with an average volume of 1.92. The company's earnings per share are 2.64, and the price-earnings ratio is 24.54.
DuPont Analysis
ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
The information above indicates that apart from the year 2014, all the other years had a relatively constant DuPont value. This is an Indication that the profit values have been increasing gradually with a slight depression in the year 2013 and 2014.
Discounted Cash Flow Stock Valuation
The current value of the stock a indicated above is 64.98 with a market capitalization of $8.21. From our earlier analysis above, we expect the company sales volume to grow by between 2-2.5% in the 2016 financial year.
Based on the cash flow analysis from the previous years, we have estimated the discount rate to be 0.2% to 0.5% positive. Thus, the 2016 share valuation based on this will be given by the formula
P
resent Valuei = Cash Flow years 1 (CF1) / (1+k(discount rate)) + CF2 / (1+k)2 + [TCF / (k - g)growth rate assumption)] / (1+k)n(number of periods)-1
CF = Operating Profit + Depreciation + Amortization - Capital Expenditures – cash taxes – Changes in Working Capital
The company net working capital of -23.75 as on 31 May 2015. Using the above parameters in the calculations, we determine that the share values are overpriced, and the correct value will be between $54.7 and $59.8 per share (Seth).
Using the Dividend discounted Model
Value of the stock = Dividend per share/(Discount rate – Dividend Growth Rate)
Based on the market conditions and the slowing growth rate owing to competition and economic factors, we expect the company dividend to continue to grow by 4% on annual basis.
Thus Stock Value = $2.2 /0.04 = 55
The present value of the company share is $55 (Marc et al.)
In light of the above analysis, I would recommend that investors holding the shares to sell as the company valuation seem overpriced by more than 10%. Those willing to buy should wait for the market to correct itself to the correct value.
Works Cited
Bernstrom, Seth. Valuation: The Market Approach. , 2014. Print.
Chen, Chun Yao. "Why Darden's Ineffective Marketing Strategy is Hurting Profits - Market Realist." Market Realist - Investment Research & Analytics. N.p., 20 Dec. 2013. Web. 10 Apr. 2016.
Darden Restaurant. "Darden Restaurant Brands | Darden Restaurants." N.p., 2015. Web. <https://www.darden.com/restaurants/our-brands>.
Koller, Tim, Marc H. Goedhart, David Wessels, and Thomas E. Copeland. Valuation: Measuring and Managing the Value of Companies. Hoboken, N.J: John Wiley & Sons, Inc, 2010. Print.
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