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Stock Analyst Update

Darden Is More Than a One-Brand Story

Best practices from Olive Garden are gaining traction across the system, suggesting that momentum will continue into fiscal 2019 and beyond.

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We believe investors should walk away from no-moat  Darden's (DRI) fourth-quarter 2018 update with two takeaways: First, operational improvements put in place at Olive Garden over the past few years continue to pay off, keeping same-restaurant sales ahead of the industry without resorting to aggressive discounting. While there were concerns about the decision to not repeat last year's "buy one, take one" promotion heading into the quarter, we believe Olive Garden's 2.4% comps (almost 200 basis points ahead of industry averages) reinforce the various levers the brand has to drive sales, while the 130-basis-point increase in segment margins to 21.2% show it can drive top-line growth without sacrificing margins. Second, Darden is more than a one-brand story, with positive comps across the portfolio. This indicates that best practices from Olive Garden are gaining traction across the system and suggests momentum continuing in fiscal 2019 and beyond.

With the strong finish to the year, we find Darden's full 2019 outlook reasonable, including 4%-5% total revenue growth--1%-2% comps (which includes negative comps at Cheddar's as the integration process continues) and 45-50 new restaurant openings (3% unit growth)--and diluted EPS of $5.40-$5.56. The company also tweaked the algorithm for its 10%-15% annual shareholder return target (7%-10% earnings growth plus 3%-5% growth in cash returned to shareholders). The target remains the same, but now calls for 10-30 basis points of annual operating margin expansion (10-40 basis points previously) and $150 million-$250 million in annual share repurchases (up from $100 million-$200 million). These targets are aligned with our outlook over the next three years; as such, we're only planning a modest increase to our $96 fair value estimate to account for the fourth-quarter upside and time value of money. We see shares as fairly valued, but operational momentum and capital returns keep the stock in favor over the foreseeable future.

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