Darden Restaurants, Inc. (DRI), Chipotle Mexican Grill, Inc. (CMG): Should You Bet Your Money on This Restaurant Stock?

Move over fine dining, here comes fast casual.

The restaurant industry seems to be one of the worst hit by low consumer spending in the economy. So much so that fast food chains seem to be the only ones making profits. What about Darden Restaurants, Inc. (NYSE:DRI)? Are they are doing fine? Let’s take a look.

Darden Restaurants, Inc. (NYSE:DRI)

Recent results

At $2.30 billion, Darden Restaurants, Inc. (NYSE:DRI)’s total sales for the quarter were 11% higher than the previous year’s sales. Darden Restaurants, Inc. (NYSE:DRI)’s Specialty Restaurant Group (including Capital Grille, Season 52, Eddie V and Bahama Breeze) witnessed maximum sales growth in the last quarter. Sales totaled $295 million, a massive 65% higher than the prior year. Among Darden Restaurants, Inc. (NYSE:DRI)’s casual dining brands, Longhorn Steakhouse saw a 14% sales growth from the previous year,driven mainly by 44 new restaurants. The restaurant chain reported sales worth $339 million. Olive Garden saw a 5.2% increase in sales, while Red Lobster saw a 3.3% growth.

Sounds pretty good, eh? Well, there is more to come.

Despite the impressive sales growth across the board, Darden Restaurants, Inc. (NYSE:DRI)’s net earnings for the quarter were down 13%, at $1.03 million. Diluted earnings amounted to $1.01 per share, as compared to $1.15 last year. What went wrong?

On average, Darden Restaurants, Inc. (NYSE:DRI)’s costs were higher in the last quarter. Higher food and beverage expenses coupled with labor expenses added to its cost of operations. Another reason stated for the lower profits was the additional expenses from the implementation out of Obama’s Affordable Care Act. Lower customer spending and falling customer traffic worsened matters. As a result, Darden’s gross and net profit margins have fallen.

What are peers up to?

What Darden requires is a way to increase customer traffic. In the last quarter, the company tried to woo customers by adding new products to its menu at reduced prices. The company should also look at ways to cut down on its costs. This is not unlike Burger King Worldwide Inc (NYSE:BKW), which has also been suffering from lower customer demand for its products. In its last quarter, the company managed a massive 49% increase in diluted earnings despite a 42.5% fall in revenues thanks to cost-cutting strategies. With its refranchising plan in place, the company should be able to cut its costs further by the end of 2013. The company has also been actively working on adding more value products to its menu, introducing low-priced products such as a Bacon Burger for $1 and the Whopper Jr. for $1.29 a few months back. It has also been toying with promotions and offers in a bid to attract customers; its latest offering is vanilla soft serve ice cream for as low as $0.50.

Interestingly, not all restaurants seem to be suffering from low customer traffic. Chipotle Mexican Grill, Inc. (NYSE:CMG), for example, seems to be doing all the right things. In its last quarter, the Tex-Mex grill chain actually witnessed higher customer traffic at its outlets. The company reported a 13.4% revenue growth, matched with a 24% growth in net income. Known for its unique marketing campaigns, organic food and natural ingredients, Chipotle Mexican Grill, Inc. (NYSE:CMG) has been giving tough competition to its peers. Albeit expensive, the company’s stock is a great performer, with a 14% average growth rate in the last couple of years. In the current quarter, analysts are expecting a 10% increase in earnings. Currently, the stock is up 21% year-to-date. A drop in its price would be a superb opportunity to go long in this one.

Planning ahead

Coming back to Darden, in the next quarter it plans to tweak its product line for different clienteles. At Olive Garden, for instance, it plans to introduce protein-centric dishes for higher-paying customers, affordable dishes for the price-conscious and lighter meals for its health-conscious guests. Also in the pipeline are four-course meals at Red Lobster and seasonal appetizers at Longhorn Steakhouse. This should give a much-needed boost to customer traffic at its restaurants.

As always, achieving this will be easier said than done. The main challenge for Darden is to make a profit in the face of rising costs. Until the company manages to do that its future does not look too promising, at least as compared to a few of its peers (read Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA).) The best bet, I believe, would be to wait until customer spending in the economy picks up. Hopefully, the company would have also come up with a solid cost-cutting plan by then. In the long run, I expect this stock to pick up momentum.

The article Should You Bet Your Money on This Restaurant Stock? originally appeared on Fool.com and is written by Sonam Chamaria.

Sonam Chamaria has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide (NYSE:BKW) and Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. Sonam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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