Darden Doubles Down on Casual Dining With Cheddar’s Acquisition


Darden picked up its first brand in five years with the acquisition of Cheddar’s Scratch Kitchen. The value-focused brand formerly held by L Catterton and Oak Investments brings another high AUV full-service restaurant into the Darden fold.

The brand fits right into Darden’s restaurant spectrum, as analyst Peter Saleh at BTIG laid out in a recent coverage note. It looks a lot like a non-Italian Olive Garden with an AUV of $4.4 million, an average check price of $13.50 and 21.4% restaurant-level margins. That’s just $100,000 less than Darden's flagship concept, which enjoys a $4.5 million AUV with a $17.50 average check and a 25.1% margin. Both concepts operate out of a 7,700-square-foot box.

Roger Matthews, head of Bank of America Merrill Lynch’s restaurant investment banking group who served as advisor to Darden through the sale, said it all started with the strong concept, one that topped a Technomic survey about value and intent to recommend. (see graphic)

“It started with the brand, and Gene Lee in particular believes the Cheddar’s business is viewed as a highly value-oriented and attractive brand by the consumer. So they felt like it was a great brand and they could run it a little better,” said Matthews.

Darden noted two major factors in the acquisition of the brand: growth potential and synergies. At 165 locations (25 franchised and 140 corporate since the acquisition of the largest franchisee, Geer Companies), the brand has a lot of whitespace. According to Darden, there are $20 million to $25 million in possible savings via synergies, or 4% of target sales. That’s not cutting overhead, just getting aligned on things such as purchasing and technology. 

“The way Darden does integration is they are very respectful of learning about what they acquired,” said Matthews. “I don’t think the goal is to come in and cut a lot of overhead.”

Synergies, he said, will give the strong leadership at Cheddar’s the benefit new economies of scale.

“On purchasing, for example, they’ll have the Cheddar’s person sit down with the Darden people in purchasing and say, ‘Where are you buying chicken, where are you buying cheese, can we do that better together?’” said Matthews.

And on technology, using the same underlying architecture and spreading that spend across multiple brands will save plenty. A technology update, especially in Darden’s to-go wheelhouse, is something for which Cheddar’s franchisees have been clamoring.

“I think there’s lots of opportunity there. One thing Cheddar’s has not done well is the to-go programs, and that is something we have desperately been wanting in the system,” said Allen Peake, now the largest Cheddar’s franchisee with 11 locations. “The other thing is the table tablets, I think that’s something that we need to have in our restaurants that I’ve seen at Olive Garden.”

Peake, who is also a Georgia state representative, said he and his partner are “pretty darn excited” about the future.

“Cheddar's is at a prime moment to be integrated in a system like Darden that really could provide a new level of leadership at the franchisor level. I’ve been a franchisee of six or seven systems over 25 years in the restaurant business. I know how critical it is to have a franchisor that is financially strong, that has real vision for the concept and is committed to its franchisees,” said Peake. “So I’m fully expecting that we’re going to see all of that from Darden.”

He said he’s gotten a lot of interest from potential buyers, too—a nice validation of the brand and an attractive exit prospect that he and his partner will be pondering.

At a 10.4X multiple or $780 million, it’s a healthy price. But as Matthews says, it was a classic win-win M&A scenario given Darden’s likely synergies.

“L Catterton has owned this biz for a while, so they were in no rush to sell. So I think on one end you can say it’s a full multiple,” said Matthews. “But on the other hand, you could say from Darden’s perspective—post synergies—it’s a meaningful discount.”

Overall, the acquisition is projected to add 12 cents to 2018 EPS (a 3% bump according to Saleh). Matthews and Darden both noted that historically, Darden achieves about 5% of target sales in synergies in acquisitions. If Darden can repeat that performance, EPS benefits could creep higher.

Darden’s stock (NYSE: DRI) popped more than 7% on the news, showing that investors are still interested in casual dining, despite the difficulties at some brands.  

“I think it really comes down to the people who buy Darden stock buy it even though the market is challenging. Darden is the leader in growing market share so they will do great for decades to come in a category that is slightly more challenged,” said Matthews. “If you really don’t like casual dining, then you would sell Darden’s stock.”

So why didn’t they jump into the fast casual arena like Cracker Barrel with Holler & Dash or Buffalo Wild Wings with R Taco and Pizza Rev? Gene Lee put it bluntly in the earnings call.

“I don't see any upside in fast casual,” said Lee. “I think the barriers to entry are really low and I think our goal is how we put the ‘full’ back into full service.”

He said time is still critical and must be respected, but there is room for full service in those parameters.

“If we can do that for at the same price or sometimes even less than fast casual, we're going to continue to win,” said Lee.

Matthews said Darden’s philosophy will be an ongoing theme for restaurant M&A: knowing the company strengths and acquiring within that.

What else might this mean for the larger restaurant ecosystem? Not much.

“Strong players have the ability to selectively and cautiously look at really good brands and make acquisitions. I think Darden and the stock price reaction confirms that the street has given them permission,” said Matthews. “But I don’t think it means other players can run out and immediately buy someone. You have to have the scale, you have to have the financial strength you have to have the operating momentum and a logical thesis.”

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