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Strategic analysis: Should Darden spin off its brands?

Part 17
Strategic analysis: Should Darden spin off its brands? (Part 17 of 25)

Darden analysis: Advertising drives higher operating expenses

High advertising expenses

Darden’s high advertising expenses as a percent of sales support the view that the company isn’t ready to switch to a much lower average check and higher guest traffic. Barington Capital Group did mention Darden’s high SG&A (selling, general, and administrative) expenses were a cost category the company could work on cutting. Howard Penney, the respected restaurant analyst, also said the company corporate overhead is bloated. He estimates that the company can shed at least 2% in costs.

Selling, General and Administrative Expense 2013-10-26Enlarge Graph

Darden includes advertisement expenses in SG&A

It’s important, however, to understand why there’s a huge difference in Darden’s SG&A expenses compared to its peers. As it turns out, a large part of that ~10% of SG&A expense as a percent of sales reported includes advertising and marketing expenses, which accumulate to ~4.78% of company revenue. Other companies often report these expenses under restaurant operating expenses.

Darden’s G&A isn’t so different from peers’

If we compare Darden to Bloomin’ Brands (BLMN), another company that has multiple brands under management, Darden’s general and administrative expenses are lower. In fact, it’s near the average when pitted against major competitors or peers like Cheesecake Factory Inc. (CAKE), Texas Roadhouse Inc. (TXRH), and Brinker International Inc. (EAT).

At first, it looked like having multiple portfolios would have a negative impact on expenses and slow things down rather than generate some economies of scale. While that may still be true, with Bloomin’ Brands’ (BLMN) G&A expense hitting 8.27% of total revenue, Darden’s SG&A expense has always been around 9% to 10% if we trace the company back to before 2006, when it only owned Olive Garden and Red Lobster.

What if G&A could be cut?

If what Penney said is true—that Darden’s corporate office is bloated and could cut its G&A (general and administrative) expense by at least 2%—then this would be a great opportunity. That is, if the company can bring G&A expense down to just 3.13%. Given that profit margin for the past 12 months has been 4.28%, a 2% reduction in G&A expense could boost profit margin up to 6.28%—a 47% increase! If the market hasn’t priced this in, it could lead to a 47% in share prices. This would be a great opportunity. It’s probably unrealistic, though, since 3.13% G&A is out of the industry norm.

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