Cheddar’s deal gives Darden chance to grow

Darden Restaurant’s $780 million deal for value-oriented chain Cheddar’s Scratch Kitchen gives the Orlando-based company room to grow, leaders said Tuesday.

“We wanted to make sure we added something to the portfolio that was going to give us strong opportunity into the future,” Darden CEO Gene Lee said Tuesday morning in a call with investors. “We think that Cheddar’s longterm can be the No. 3 brand and maybe the No. 2 brand in the portfolio.”

It’s a bold statement for Lee, who oversees a group of restaurants including Olive Garden and LongHorn Steakhouse, as well as specialty brands Capital Grille, Eddie V’s, Yard House, Seasons 52 and Bahama Breeze. Olive Garden has 843 restaurants and LongHorn has 488.

Cheddar’s has 165 restaurants, but a smaller geographic footprint and a recent pattern of growth.

In outlining the Cheddar’s deal Tuesday, Lee said Darden has the potential for a new restaurant brand that could grow not only in the number of locations, but also could cut behind-the-scenes costs and add revenue with carryout, a big emphasis for Darden in recent years.

Investors took kindly to the deal. Darden stock (NYSE: DRI) was up 9.3 percent in trading and shares closed at $82.62 Tuesday, a record high for the company.

Darden Restaurants is the biggest publicly traded company headquartered in Orlando, with 1,500 restaurants and about 150,000 employees nationwide, including about 1,000 workers at the headquarters off John Young Parkway.

Cheddar’s has about 15,000 employees at its restaurants.

Apart from the deal, in a note to investors analyst Chris O’Cull of Key Bank said Darden was managing to grow sales while others in the industry were losing.

The average check at Cheddar’s restaurant is about $13.50. That price brings it closer to Cracker Barrel or Red Robin, compared to Olive Garden customers who spend about $17 each during a visit, according to financial reports.

Cheddar’s makes its revenues on volume, with each restaurant bringing in about 6,300 customers a week, Lee said.

Still, Cheddar’s gives Darden room to grow while flagship brand Olive Garden has nearly saturated the market.

“Obviously investment in an Olive Garden will yield you a higher return, however the opportunity to open Olive Gardens is not as plentiful as Cheddar’s,” Lee said.

Most Cheddar’s locations are in the Texas region or the Southeast.

To-go ordering has grown 60 percent at Darden brands in the last three years, Lee said. That could provide reason to push Cheddar’s to develop a carry-out program.

“There is a huge opportunity for to-go in Cheddar’s, and the management team is just starting to seize that opportunity and figure out what they have to do make that work,” he said.