Darden Can Carry Momentum Into 2019
Reduction in menu items and other productivity initiatives are making a difference at concepts beyond Olive Garden.
The key takeaway from Darden's (DRI) fiscal 2018 second-quarter update wasn't just its outperformance relative to the casual dining space--comps for Darden's legacy brands increased 3.1%, which outperformed the industry by just over 400 basis points--but the efficacy with which it is applying to its other concepts. Olive Garden (3.0% comps) continues to benefit from a combination of more effective opening price point strategies, reduced menu complexity (but still allowing for innovation), restaurant configurations that unlock greater delivery/catering opportunities (to-go sales increased 12% in the quarter), and productivity technology tools (labor and food cost management) that improve operational efficiency. However, we're starting to see these aspects contribute more significantly at other concepts, most notably at LongHorn where a 25%-30% reduction in menu items and other productivity initiatives helped drive 3.8% comps and 120 basis points in segment margin improvement to 15.6%.
We're seeing more competitors taking pages out of Darden's playbook--including menu rationalization and strategies to increase frequency like Buy One Take One and Pasta Passes at Olive Garden--which still forms the basis for our no-moat rating. Still, we believe Darden can carry its momentum into 2019, especially if tax reform and Cheddar's synergies free up capital to accelerate guest experience efforts. As such, management's modest upward revision to fiscal 2018 guidance--legacy brand comps of 2%, 40 new restaurant openings (implying 3% organic unit growth), total sales growth of 13%, and EPS of $4.45-$4.53--strikes us as feasible goals. We plan to raise our $86 fair value by a few dollars based on a more optimistic near-term outlook and still view Darden as an attractive capital allocation story (high-single-digit dividend per share growth and target of $100 million-$200 million in annual share repurchases). However, we see shares as appropriately valued at current levels.
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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.