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Stock Analyst Update

Darden's Momentum Should Continue

Guest experience, menu management, off-premise sales, and operational simplification should continue to drive growth for the casual-dining chain.


 Darden's (DRI) fourth-quarter update offered a blueprint for casual-dining chains looking to stay relevant in an uneven restaurant environment, with guest experience, menu management, off-premise sales, and operational simplification driving companywide comp growth of 3.3% (outpacing ex-Darden industry trends by 480 basis points). More important, Darden appears to be well positioned to migrate the best practices driving core brand outperformance to its other concepts, including more effective opening price point strategies similar to Olive Garden's Cucina Mia $9.99 menu, restaurant improvements that unlock greater delivery/catering opportunities, and productivity technology tools (labor and food cost management) that further simplify operations. While we believe many of these strategies can be implemented at other casual-dining chains--the rationale behind our no-moat rating--they set the stage for continued momentum in fiscal 2018.

We plan to increase our $75 fair value estimate around 10% as we incorporate more optimistic near-term top-line growth assumptions, adjust for time value of money, and assume a lower long-term tax rate stemming from U.S. tax reform. While we believe Darden is priced appropriately relative to our updated FVE, we view management's fiscal 2018 guidance--comp growth of 1%-2%, total revenue growth of 11.5%-13.0%, adjusted EPS of $4.38-$4.50 excluding $0.06-$0.08 of Cheddar's integration costs--as conservative despite more difficult comparisons and setting the stage room for upside surprises. Over the next five years, our model assumes organic top-line growth of around 6% with adjusted operating margins improving from 10% in fiscal 2016 to almost 12% by fiscal 2022, with profitability driven by operational efficiencies and improving store economics and synergies from Cheddar's (consistent with our third-quarter note, management raised its forecast annual synergy to $22 million-$27 million starting in fiscal 2019 from $20 million-$25 million).

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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.