Darden's To-Go Orders Lifting Sales
Our fair value estimate remains intact, and we see shares as significantly undervalued.
No-moat Darden's (DRI) April 20 business update tells us two things about the company and the full-service restaurant industry. First, comp trends for casual dining appear to be gradually improving. After bottoming out at the weeks of March 22 and March 29 with declines of 75%, consolidated comps have improved to a decline of 65% the week of April 12 and 60% the week of April 19. Olive Garden and LongHorn have led this improvement with comps decline of 45% and 60% the week of April 19 versus trough declines of 71% and 75% the weeks of March 22 and March 29, respectively. To-go orders have been the primary driver, as Olive Garden's weekly to-go sales per restaurant have improved to $53,000 (pre-COVID-19 average of $15,500) and LongHorn's have improved to $29,000 (pre-COVID-19 average of $6,400). Not surprising, Darden's fine dining and other businesses--which have put less emphasis on to-go platforms--continue to struggle, with comp declines of more than 80% the past two weeks. This will likely continue until social distancing requirements ease, with uneven guest counts thereafter. We may slightly raise our fourth-quarter outlook calling for 45% comp declines (versus a quarter-to-date decline of 45%) but remain comfortable calling for fiscal 2021 comp declines in the midsingle digits.
Second, restaurants continue to shore up their financial flexibility through new sources of funding. To that end, Darden priced an offering of 7.8 million shares at $58.50, with an underwriter option for another 1.2 million. In total, this could give the company $500 million in additional cash on top of the $1 billion in investable cash it had on its April 7 update. Based on a current weekly cash burn rate of $20 million but also factoring in incremental expenses as restaurants reopen, we believe Darden has more than 70 weeks of runway.
There is no change to our $95 fair value estimate based on recent sales trends and the equity offering, and we see shares as significantly undervalued.
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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.
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