Not all of the investment community is excited about Darden’s recent $715 million acquisition of Ruth’s Chris Steak House.
BTIG analyst Peter Saleh said in a report that his company has a mixed opinion. They all understand the financial rationale (Darden’s fine-dining category grew from $830 million to almost $1.4 billion), but some are skeptical because of too many redundancies with fellow concept The Capital Grille.
“For previous acquisitions like Cheddar’s and Yard House, we easily saw what these concepts added to the portfolio, but are less enthusiastic about Ruth’s given the existing overlap,” Saleh said in his report.
BTIG had a breakdown of Darden’s three fine-dining concepts:
Restaurant Size (square feet)
- Ruth’s Chris: 8,000
- The Capital Grille: 10,000
- Eddie V’s: 10,000
- Ruth’s Chris: $97
- The Capital Grille: $92.50
- Eddie V’s: $109
- Ruth’s Chris: 20 percent
- The Capital Grille: 27.7 percent
- Eddie V’s: 30.1 percent
- Ruth’s Chris: $6.2 million
- The Capital Grille: $9.3 million
- Eddie V’s: $9 million
- Ruth’s Chris: 131 (80 company-owned, 51 franchises)
- The Capital Grille: 62
- Eddie V’s: 29
- Ruth’s Chris: $485.3 million
- The Capital Grille: $571 million
- Eddie V’s: $260 million
The analyst added that BTIG feels integration costs are high versus Yard House (acquired in July 2012 for $585 million) and Cheddar’s (acquired in March 2017 for $780 million). For Ruth’s Chris, Darden estimates total acquisition and integration-related expenses of $55 million pre-tax. Cheddar’s was $25 to $35 million and Yard House was $16 million to $23 million. Darden attributed Ruth’s higher expense to it being a public company and the fact that change of control and other obligations is Darden’s responsibility as opposed to a private equity owner like in past deals, Saleh explained.
The biggest difference from Capital Grille is that Ruth’s Chris has less restaurant square footage and a lot more locations in the U.S., particularly in suburban and smaller markets like Birmingham, Alabama; Destin, Florida; Annapolis, Maryland; and Wilmington, North Carolina. Comparatively, Capital Grille is focused on urban markets and major city centers.
Darden CEO Rick Cardenas prefaced that the company has owned Ruth’s Chris for a brief amount of time. It hasn’t yet sorted through the chain’s consumer data and determined how it may compare to other brands. When asked by Raymond James analyst Brian Vaccaro about the overlap during the company’s Q4 earnings call in June , Cardenas pointed toward the geographic differences.
“One of the primary reasons is geography,” said Cardenas, stating his case as to why there isn’t overlap. “If you look at [Ruth’s Chris], they have 150-ish restaurants, including the franchise system, and they have restaurants in markets that Capital Grille doesn’t have restaurants in. And even in markets that Capital Grille has restaurants in, they’re not necessarily close to each other in a lot of those markets.
“So there isn’t as much overlap as you would expect,” he added. “And that’s a good thing for us, good thing for Ruth Chris, and it’s a good thing for Capital Grille. But then I would add that if you think about Eddie V’s and Capital Grille, we’ve had this kind of scenario for many years. Where Eddie V’s guests may go to Capital Grille, but they go for different occasions.”
With the acquisition, Darden anticipates cost savings of $20 million by the end of fiscal 2025 via supply chain and G&A. It also expects Ruth’s Chris will be accretive to earnings per share by approximately $0.10 to $0.12 in fiscal 2024 and $0.20 to $0.25 in fiscal 2025. Additionally, inclusive of the steakhouse, Darden projects $11.5 billion to $11.6 billion in sales in fiscal 2024. However, fine dining same-store sales won’t include Ruth’s Chris until after 16 months.
As for future purchases, Cardenas said M&A remains one of Darden’s best uses of capital. But first it wants to digest the Ruth’s Chris deal. He did note that the company’s EBITDA has grown from $1.2 billion pre-COVID to $1.7 billion to $1.8 billion.
“That gives us a lot more cash to do those things and increase our share buyback and M&A,” Cardenas said. “We’ve talked about M&A often. M&A adds to our scale, which is our biggest advantage … We’ve got plenty of cash, we’ve got plenty of debt capacity.”