--Darden buys Yard House for $585 million in all-cash deal
--Darden says Yard House has potential to open 150 to 200
locations in the U.S.
--Yard House joins other specialty Darden brands including
Capital Grille and Bahama Breeze
Darden Restaurants Inc. (DRI) is buying one of casual dining's
rising stars, Yard House USA Inc., to help it continue opening new
restaurants once it has tapped out of Olive Garden and Red Lobster
expansion in the U.S.
Darden, which owns the Italian and seafood chains as well as
LongHorn Steakhouse, has been expanding what is known as its
specialty-restaurant group--which includes higher-end chains such
as Capital Grille and Bahama Breeze--through small acquisitions.
But its $585 million all-cash deal to purchase Yard House
represents a significant investment.
Lately, Darden's smaller specialty-restaurant group, which Yard
House will soon join, has been outperforming its more mature, core
brands.
Darden has seen its business fluctuate with the shaky economy.
Last month, the company said the "frustratingly slow" economic
recovery was forcing it to focus more on affordability at Olive
Garden and Red Lobster to stay attractive to value-oriented
customers. However, it is also facing higher food costs and tougher
competition.
"Yard House gives Darden greater exposure to both younger and
more-financially resilient customers," demographics that Olive
Garden and Red Lobster seem to have lost, Darden Chief Executive
Clarence Otis said during a conference call Thursday night.
Yard House, which opened its first restaurant in 1996, now has
39 restaurants in 13 states. Its vast burger and draft-beer menu is
more upscale than most bar-and-grill establishments, and industry
analysts said the next generation of casual diners is looking for
this more-polished feel.
Yard House is also "poised to take massive market share from
aging mass-casual competitors, as baby-boomers continue to shift
their dining-out preferences towards better environments where they
can control the pace of their dining experience," said Cowen
analyst Paul Westra.
Darden says Yard House has the ultimate potential of opening at
least 150 to 200 locations in the U.S., and is on track to open six
to eight new locations each year for the next two years. Darden
currently has 786 Olive Garden locations in the U.S.
"And now, with the inclusion and the support and, frankly, the
muscle of Darden to help us there, we think we can possibly
increase those numbers, but time will tell," Yard House Chief
Executive Harald Herrmann said during the conference call.
Yard House generates sales of about $800 per square foot, second
only to the legendary Cheesecake Factory (CAKE) among national
casual dining chains of size, noted Raymond James analyst Bryan
Elliott. "We believe it will play a key role in sustaining Darden's
top-line growth goals as the core Olive Garden and Red Lobster
concepts approach their ultimate footprint potential within the
next few years," Mr. Elliott said.
But still, competing for guests with a burgers-and-beer motif is
tough. The market is full of similar concepts, making it difficult
for restaurants to stand out.
"As we look at the bar-and-grill segment, it's an enormous
segment," Mr. Otis said. "The challenge is to be differentiated in
that segment...Yard House is very differentiated, and that's what's
driving the high average unit volumes that it enjoys."
Yard House's younger customers are also ordering more alcohol, a
menu category that carries a much-higher profit margin than food.
About 30% of Yard House's sales come from alcohol, which is double
the average for mid-scale bar-and-grill chains, said Miller Tabak
analyst Stephen Anderson. Darden wants to implement some of Yard
House's bar expertise in its other restaurant chains, which Mr.
Anderson said are lacking.
With the addition of Yard House's projected $368 million in
sales in fiscal 2013, Darden's specialty-restaurant group should
generate about $1 billion in annual sales, the company said. But
that is still less than a third of what Olive Garden generated last
fiscal year.
Darden's shares were recently down 12 cents to $50.08, as
"investors may be disappointed in the reduction in expected cash
return to shareholders," as a result of the acquisition, said
Bernstein analyst Sara Senatore. The deal is expected to lower
Darden's per-share earnings in fiscal 2013 by about three to five
cents, from acquisition costs and lower share buybacks by the
company.
Write to Annie Gasparro at annie.gasparro@dowjones.com