Darden To Benefit From Yard House Deal, Analysts Say

Wall Street analysts on Friday praised Darden Restaurants Inc.'s decision to acquire the growing Yard House chain, saying the hip, young brand will be a spark within the largest casual-dining operator's more mass-market portfolio.

Orlando, Fla.-based Darden said Thursday that it has agreed to buy Yard House USA Inc. for $585 million in cash in a deal expected to close in Darden's second quarter.

Following the announcement, most analysts argued that Yard House would certainly benefit from Darden's resources as the largest casual-dining operator in terms of scale, supply chain and operational strengths, as well as its access to real estate. Others pointed to the upside for Darden.

"Yard House fits well within their portfolio and has no operational (i.e. distraction) impact on the core brands," wrote Jeffrey Bernstein of Barclays Capital Inc. "And we should not forget the expertise Yard House offers Darden's portfolio, such as successful bar operations and targeting a younger demo."

The high-grossing draft beer chain was sold by private-equity firm TSG Consumer Partners LLC, based in San Francisco, which acquired a 70-percent stake in Yard House in 2007 for an undisclosed price. At the time, Yard House had 16 locations.

Irvine, Calif.-based Yard House will join Darden's growing Specialty Restaurant Group, which includes The Capital Grille, Bahama Breeze, Seasons 52 and Eddie V's.

The sale price represented about 1.5 times the estimated fiscal 2013 revenues of $368 million for Yard House, or 12.5 times the earnings before interest, taxes, depreciation and amortization of $44 million, the company said.

In a slew of reports Friday, some Wall Street restaurant analysts noted that the price was higher than the dining transactions of late, which tend to be around eight- to 10-times EBITDA. However, they were not surprised, given the Irvine, Calif.-based chain's strong performance and the scarcity of "new generation," polished, casual-dining brands that would meet Darden's high standards.

Paul Westra of Cowen and Co. estimated Yard House's valuation at $685 million, including $265 million for existing units in 2013, plus "growth potential" worth about $420 million.

"We view Yard House as one of America's best-positioned polished-casual dining concepts," wrote Westra, "sitting atop a group of higher-end concepts poised to take massive market share from aging mass-casual competitors as Baby Boomers continue to shift their dining-out preferences toward better environments where they can control the pace of their dining experience."

Founded in 1996 in Long Beach, Calif., Yard House is known for its wide selection of beer — most restaurants have more than 130 beers on tap with a wide selection of both traditional and international brews, as well as craft and specialty beers. Yard House claims an impressive 39 percent of its sales from alcohol, which is among the highest in casual dining.

About 57 percent of sales come from food, and Yard House is also acclaimed for its broad eclectic menu, developed by one of the founders, Carlito Jocson.

Darden also noted that Yard House restaurants play great music. For years, Yard House founder Steele Platt personally selected the classic-rock music playlist for the chain.

The average check is about $20.43. Dinner is the chain's biggest daypart, accounting for about 46 percent of sales, with 22 percent from happy hour, 21 percent from lunch and late night accounting for about 11 percent.

Yard House has an average unit volume of $8.4 million from a typical footprint of about 10,500 square feet. But Darden noted that the 10 most recent restaurants that have been open a full year averaged $9.7 million in annual sales.

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Darden officials said they see significant "white space" ahead for Yard House, saying there is an opportunity for at least 150 to 200 restaurants nationally. In addition to the 39 open across 13 states currently, three more Yard House locations are under construction and the company has another five leases signed and four more letters of intent.

Analyst Bryan Elliott of Raymond James wrote Friday that Yard House will likely play a key role in 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."

Darden officials said earlier this year the company would continue to fortify its portfolio, and rumors have circulated for months that Yard House was among Darden's possible targets. Speculators had also pointed to BJ's Restaurants Inc., and California Pizza Kitchen as other possible acquisition options.

Last November, the company acquired the Eddie V's upscale seafood brand along with three Wildfish Seafood Grill restaurants for $59 million, which also joined the Specialty Restaurant Group. And Darden bought Rare Hospitality International Inc., and its LongHorn Steakhouse and The Capital Grille brands, in 2007 for $1.19 billion.

Some say Darden isn't done yet.

One analyst sees Bravo Brio as a possible acquisition target in future, though probably not until 2014 or 2015, after Yard House is integrated into the Specialty Restaurant Group.

"We still think Bravo Brio possesses desirable attributes for a longer-term strategic acquisition by Darden," Stephen Anderson, senior analyst with Miller Tabak & Co. LLC, wrote Friday. "Early-stage expansion (less than 100 units currently versus a long-term goal of at least 300 units), exposure to higher-income demographic groups, and a high incidence of alcoholic beverages as a percentage of total sales (21 percent)."

The Yard House acquisition will grow Darden's Specialty Restaurant Group by about 50 percent, with estimated annualized sales increasing from $632 million pre-deal to an estimated $959 million, based on 2012 data. Darden on Thursday maintained its fiscal 2013 outlook, saying same-store sales would be up between 1 percent and 2 percent.

The after-market news Thursday sent Darden's stock on a downward trend Friday after opening at $49.64 and dipping by about 13 percent by midday.

Anderson of Miller Tabak & Co. LLC, speculated that some investors may be concerned about Darden being distracted from efforts to turn around sales at its largest brand, Olive Garden, which accounts for about 40 percent of sales. Others saw the deal as a wise strategic move for the future.

"How smart they are," said Gary Levy, director of the hospitality industry practice for J.H. Cohn LLP. "Darden is looking at its company and saying, 'We have these brands, and they're not growing the way they used to. So what can we grow?'"

The sale of Yard House leaves TSG Consumer Partners without a full-service restaurant player within its portfolio, though the private-equity firm last year bought a stake in the Stumptown Coffee Roaster chain, based in Portland, Ore., and reports said it planned to grow that brand.

Contact Lisa Jennings at lisa.jennings@penton.com.
Follow her on Twitter: @livetodineout