It isn’t every day that a major casual dining company precedes a financial review with a $780 million jolt. In this sector of the industry especially, it has become commonplace for organizations to huddle and guard their assets. Even surging Red Lobster, the brand Darden sold in 2014, hasn’t opened a U.S. store in two and half years.
But Darden and its portfolio of more than 1,500 restaurants and $7 billion in annual sales isn’t sitting tight. Just the opposite actually.
Purchasing Cheddar’s Scratch Kitchen, a 165-unit chain based out of Texas, gives the company a proven high earner with positive growth potential, it says. Darden president and CEO Gene Lee explained in a conference call Tuesday that Darden is already outperforming industry benchmarks by 510 basis points after same-store sales grew 0.9 percent in the third quarter at Olive Garden, LongHorn Steakhouse, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, and Eddie V's.
In other words, now was a prime time to make a move, and Cheddar’s was the ideal target.
“When you look at all of these things, it’s easy to see why Cheddar’s, a strong brand on its own, is an excellent fit for our company,” Lee said in the call, referring to Darden’s core values. “The addition of Cheddar’s to the Darden portfolio further enhances our scale. Our significant scale will provide meaningful synergies for Cheddar’s, furthering strengthening our already robust business model. Additionally, being a part of Darden provides Cheddar’s the opportunity to leverage all of our competitive advantages to help increase sales and margins in existing restaurants and drive disciplined, profitable new restaurant growth.”
While fitting from a cultural perspective is key, a company the size of Darden wasn’t going to make a move based on principle alone.
“The restaurant-level economics are very attractive,” Lee said.
Cheddar’s has average restaurant volumes of $4.4 million. Average restaurant guest counts of around 6,300 per week, which is substantial, and an average check of $13.50.
“All of which help provide a strong return on investment,” Lee added.
Another driving factor is the reality that 165 units isn’t exactly a substantial number to the Dardens of the world, providing what Lee called “a considerable runway for growth.” Cheddar’s has three restaurants in its pipeline for 2017 and eight for fiscal 2018. Those numbers could change dramatically in the future with Darden grabbing the wheel.
Lee also noted that Cheddar’s isn’t exactly an unknown commodity, either. It is a leader in value perception and intent to recommend, two metrics that typically anchor same-store sales. Just check out this Market Force Information study, which placed Cheddar’s ahead of Cracker Barrel in customer’s hearts, as proof.
Cheddar's didn't always enjoy this kind of appreciation. It was opened by Aubrey Good and Doug Rogers as Cheddar’s Casual Café in 1979. And it wasn't until July 2016 that it rebranded to include "Scratch Kitchen" in its title, hoping to convey the chain's commitment to freshly made meals. “It’s an opportunity to reiterate what we’ve always been,” CEO Ian Baines told FSR at the time.
Financially, Rick Cardenas, the senior vice president, chief financial officer, said in the call that purchasing Cheddar’s will inject optimism into the company.
“… The addition of Cheddar’s to our portfolio gives us even more confidence in our ability to achieve our long-term value creation framework we have discussed previously. We also intend to maintain our investment grade credit profile. In addition, the terms and structure of this transaction will put us more in line with our targeted leverage range of two to two and half times adjusted debt to adjusted EBITDA.”
He also added that the PNL is around a 17 percent restaurant EBITDA—strong for the industry. There are 25 franchises and the rest are company owned.
“They’ve grown about 12 to 15 percent over the last 10 years and we feel really confident about their continued growth,” he said.
Baines is sticking around as president of the brand.
“Today is a really exciting day for the Cheddar’s team,” he said in the call. “This acquisition is the right next step for us as a brand. Being a part of Darden, benefiting from the support structure and expertise in developing brands will enable us to reach our growth potential by opening up new opportunities that were previously out of our reach.”
He also spoke of the tangible fit.
“The cultural fit between both parties that Gene discussed will ensure a smooth transition for us and help us to stay focused on delivering exceptional experiences to our guests. We will be stronger because of Darden and I am confident we will make a meaningful contribution as part of the company.”