Tax Reform Drives EPS Upside for Darden
Management expects fiscal 2018 earnings per share to tick up, and we continue to view the stock as a solid capital-allocation play.
Ahead of its presentation at the 2018 ICR Conference, Darden (DRI) provided a preliminary outlook for the impact of tax reform, including a revaluation of deferred tax assets and deferred tax liabilities item (management expects to record noncash net tax benefits of approximately $70 million, or approximately $0.56 per diluted share) and a lower corporate tax rate (expected to bring the firm's fiscal 2018 effective tax rate to 18% from 25%). However, not all of the benefit will directly fall to the bottom line, as the company plans to invest an incremental $20 million in its workforce during the back half of the year, although the breakdown between workforce wage increases and/or other employee benefits was not disclosed. Altogether, management now expects fiscal 2018 EPS of $4.70-$4.78-–up from prior estimates of $4.45-$4.53–-a range that looks achievable to us.
Factoring in the tax reform benefits beyond 2018, as well as the workforce investments (which will likely bring full-year operating margins to the high-9% range from our prior forecast of 10%), we’re planning a modest increase to our $92 fair value estimate. Management left the rest of its full-year outlook intact--including comps of 2%, 40 net new openings, and total sales growth of 13%--which appears realistic and perhaps conservative if we see a positive consumer spending impact coming out of the recent tax reform. We’ll wait until management’s ICR presentation to shore up our estimates, but we still see a path to low-11% operating margins over the next five years through sales leverage and other operational efficiency investments. We make no change to our no-moat rating following the announcement, as we expect other casual dining rivals to deploy tax benefits to implement many changes that Darden has put in place. While we view shares as fairly valued, we still expect positive sales momentum over the next few quarters and view the stock as a solid capital-allocation play.
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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.