Rising Star Buy: Darden Restaurants
This article is part of ourRising Star Portfolio series.
Early this month, I revealed three community watchlist stocks for the socially responsible Rising Star portfolio I'm managing for Fool.com. I've picked one to purchase: Darden Restaurants (NYS: DRI) .
This stock may sound like it's more about ubiquitous restaurants in countless paved pockets of the American landscape, but guess what: Darden's greener than you think.
Orlando, Fla.-based Darden is the name behind quite a formidable portfolio of restaurant concepts: Olive Garden, Red Lobster, LongHorn Steakhouse, Capital Grille, Bahama Breeze, and Seasons 52. It also has one test "synergy" restaurant, which has a Red Lobster and Olive Garden in one building.
Darden boasts of its status as the largest company-owned-and-operated full-service restaurant company, and it has indeed spread a massive number of its eateries across America, generating $7.5 billion in annual sales.
All told, Darden, which was founded in 1968, operates about 1,800 restaurants. Red Lobster and Olive Garden comprise the majority of its store count. Darden obtained the Capital Grille and LongHorn Steakhouse chains when it acquired RARE Hospitality in 2007.
Darden employs about 180,000 people, and it ranked at No. 97 on Fortune magazine's "100 Best Companies to Work For" list in 2011 for providing health insurance benefits to part-time workers, which is definitely not standard practice among its industry peers. Note that the only remotely similar companies that made the list are Starbucks (NAS: SBUX) and several grocers, including Whole Foods Market (NAS: WFM) .
Why I'm buying
Is Red Lobster green? Darden has some very interesting sustainability initiatives. That's quite a distinction in the restaurant industry, which tends to stomp out a particularly large carbon footprint.
According to the Green Restaurant Association, restaurants are responsible for one-third of all the U.S. energy consumed by the retail sector. Furthermore, the restaurant industry is five times more energy-intensive than the retail, office, and hospitality industries.
Darden is differentiating itself through attention to the issue, though. According to CEO Clarence Otis, "Sustainability plays a big part in our overall business strategy as we strive to make a difference on issues ranging from seafood sustainability to energy efficiency, from water use to how we treat our employees."
Last August, Darden announced plans to install the largest private solar array in Florida at its Restaurant Support Center; the solar installation will subsidize 15% to 20% of the center's annual energy usage. Darden's Restaurant Support Center has other green attributes under its belt; in 2009 it received the Leadership in Energy and Environmental Design (LEED) Gold certification for factors like daylight harvesting and water conservation.
Darden has vowed to cut its energy and water usage by 15% by 2015, and ultimately eyes sending zero waste to landfills. In addition, it's out to protect the red lobsters: Darden has been recognized for its commitment to rebuilding challenged fisheries through Fishery Improvement Projects in partnership with Publix Super Markets and the Sustainable Fisheries Partnership.
Beyond all this do-gooding, Darden's stock is priced in bargain territory right now. It's trading at just 11 times forward earnings, and sports a PEG ratio of 0.92. According to those metrics, Darden's a tad cheaper than chain restaurant stocks like Cheesecake Factory and P.F. Chang's China Bistro (NAS: PFCB) , and it's much more reasonably priced than high-flying eateries Chipotle (NYS: CMG) and Panera (NAS: PNRA) .
Meanwhile, here's one more treat on the menu: Darden's a dividend payer, with a trailing annual yield of 3.9%.
And now, the risks
The restaurant industry is extremely competitive, particularly in these difficult economic times. Restaurant companies contend with their patrons' array of choices for dining out, as well as many Americans' strained budgets and volatile commodity prices. There are good reasons cheap eats giant McDonald's (NYS: MCD) has been serving up a competitive McSmackdown lately, and one of them is the Dollar Menu.
The fact that eating out is one of the easiest monthly expenses struggling consumers can slash from budgets is a serious risk for all casual dining chains. Darden certainly isn't exempt from the ill effects of frugal consumers and reduced dining traffic. Last quarter, it revealed higher costs and weakness at its Olive Garden chain, helping take some of the steam out of its share price.
I'm not thrilled by the pile of debt Darden took on when it acquired RARE Hospitality, either. Its total debt-to-capital ratio of 48.5% makes me a bit uncomfortable. I'm not a fan of much if any debt on companies' balance sheets, so this is a red flag worth mentioning. Should revenue and profitability lag, that debt could become very onerous indeed.
Foolish bottom line
Darden operates several well-known, popular brands, and it's also got promising concepts like Capital Grille and LongHorn Steakhouse with plenty of room for expansion and potential future growth. Furthermore, it's quietly putting some social responsibility on the menu, too, even though its industry peers aren't usually renowned for including "sustainability" as a major ingredient to spice up their operations.
Getting Darden at its current bargain price makes this good deal even better.
At the time this article was published