Both the restaurant and financial worlds were holding their breath last week when casual dining giant Darden reported earnings for its fourth quarter and fiscal year, both of which ended May 25, 2008. But no one was watching closer than the people at Sun Capital Partners. Thatâ€™s the firm that bought Smokey Bones Barbeque & Grill, shortly after Darden shuttered 56 underperforming units in May, 2007. Did Sun Capital make the right deal at the right timeâ€¦or did Darden get out while the getting was good?
Sun Capital closed its Smokey Bones acquisition last December, and it looked like a canâ€™t-lose proposition at the time. The company (technically, an affiliate known as Barbeque Integrated, Inc.) paid $80 million for the 73 Smokey Bones units that were still operating.
Thatâ€™s a sweet price for a chain where the food was good, the real estate even better, the reputation was national and all the lousy units had just been axed. How sweet? Sun Capital paid just over $1 million each for stores that have a 7,000 sq. ft.-footprint (on average) and take in $3 million per year. Try building something similar for that price.
Darden said it had gotten out of the barbeque business only because it couldnâ€™t foresee growing Smokey Bones out to the 500-600 units that constitute critical mass for a company of Dardenâ€™s scale. The former parent company last year took a $260 million pretax charge for the units it closed. Ouch.
Yet with a different ownership, Smokey Bones looked like a license to print money. Optimism certainly ran high at Sun Capital.
â€śSmokey Bones is an exciting concept with the right ingredients for future growth: high average sales per restaurant, strong restaurant management teams, established operating systems and a unique barbecue flavor platform that is growing in popularity,â€ť said Sun Capitalâ€™s Anthony Polazzi when the deal was announced.
â€śAs a standalone entity, Smokey Bones will be able to pursue its own strategic objectives and focus on expanding its network of stores, while maintaining superlative customer service and adding new flavorful menu offerings,â€ť added Smokey Bones c.e.o Ian Baines, who transferred over from Darden. â€śOur goal is to become the best barbeque experience around.â€ť
Sun Capital is skilled at breathing new life into struggling businesses of all kinds and selling them to someone else at a big profit a few years down the road. The restaurant part of its portfolio right now contains eight restaurant brands (including Boston Market, Friendlyâ€™s and Fazoliâ€™s) that collectively have 2,200 locations and $3.4 billion in revenue. The big question: What steps is Sun Capital taking to get Smokey Bones back into growth mode in this economy?
Thatâ€™s where the news of the Darden results comes in. Itâ€™s tricky to compare the companyâ€™s numbers to year-ago figures and draw conclusions because Darden got rid of one big chainâ€”Smokey Bonesâ€”and acquired an even-bigger oneâ€”RARE, including LongHorn Steak and Capital Grilleâ€”during this period. So weâ€™ll just give you the big picture: Darden grew both sales and net earnings for the quarter, but not by much. If you view Darden as a proxy for all of casual dining, get ready. Times are tough, and could well become tougher.
â€śWe once again delivered competitively superior financial results,â€ť said Clarence Otis, Dardenâ€™s chairman/c.e.o. â€śAnd we were able to do so while making considerable strategic progress and navigating a challenging consumer and cost environment.â€ť
That navigation included sharply lower restaurant traffic at the companyâ€™s Red Lobster (down five to six percent in April) and LongHorn Steakhouse (down at least five in March, April and May) concepts. Price increases taken during the period helped same store sales look better against prior year figures.
Smaller Darden concepts Capital Grille (same-stores sales down 3.8 percent from the prior year) and Bahama Breeze (down 3.7 percent) also slumped.
If youâ€™re a Darden exec, youâ€™re probably thinking this past year was a good time to get out of the barbecue business and into the steakhouse business, which it did by acquiring LongHorn. That doesnâ€™t mean that Smokey Bones canâ€™t do well under Sun Capital. But the new owners are stuck trying to pump new life into a concept during a mediocre-at-best market. Whatâ€™s their strategy?
So far, Sun Capital is playing it close to the vest. The Smokey Bones unit count still stands at 73, as it has since May, 2007. But the chain has already made tweaks to its menu. The Jacksonville Business Journal reports the addition of 20 new items including â€śthree different sizes and four different sauce choices for hickory-smoked baby back and St. Louis-style ribs; fire-grilled steaks in three different size cuts with four different flavor options; two new signature steaks; slow-smoked barbecue appetizer and sandwich selections like pulled pork sliders, barbecue shrimp poâ€™ boy and a pulled pork Cuban sandwich; a Blazinâ€™ Shrimp appetizer; grilled Atlantic salmon; and smokehouse chicken entrees.â€ť
Only a handful of dishes were taken off the menu, including a portobello chicken wrap, fried chicken and beer-battered fish.
â€śThese new menu choices are just one of several changes weâ€™re implementing to put the spirit and energy back into Smokey Bones,â€ť Baines says. â€śWe also are implementing later hours and new signature drink selections, a late night menu and beer promotions to make our bars a fun place to watch a game or just kick back with friends or family.â€ť
So far, this is pretty modest as turnaround efforts go. But give the Sun Capital brain trust some credit. They know enough to keep their powder dry in tough times and wait for the market to turn around before rolling out anything bigger.
And when will that turnaround come? Probably not next year. Hereâ€™s how Darden president Andrew Madsen characterized the companyâ€™s outlook on 2009 on last weekâ€™s earnings conference call. â€śWe expect the full service dining environment over the near-term to be similar to what we have experienced most recently. In particular, industry traffic will most likely remain depressed and cost pressures will be comparable to what we experienced during fiscal 2008.â€ť
In other words, no break from the tough operating environment Darden, Smokey Bones and every other casual dining operator finds themselves in now. Madsenâ€™s a smart guy, but for the industryâ€™s sake, letâ€™s hope heâ€™s overstating the case just this once.