Darden Positioned For Uneven Near-Term Industry Traffic
We made no change to our fair value estimate and see shares as undervalued.
We have two takeaways from no-moat Darden's (DRI) May 19 update, where it disclosed that quarter-to-date comps have declined 47.9% (down 39.4%, 45.8%, 63.1%, and 65.5% for Olive Garden, LongHorn, fine dining, and other segments, respectively). First, we expect guest traffic trends to be uneven across the full-service restaurant category as shelter-in-place restrictions are gradually lifted. Darden, which has 49% of its dining rooms open at 25%-50% capacity as of May 17 (and expectations of 65% open with limited capacity by the end of May), has experienced comp declines around 30% in locations with open dining rooms the past three weeks. We expect near-term industry traffic volatility--including a pent-up demand surge in early summer as restaurants reopen, followed by uneven trends in mid- to late summer due to restaurant execution issues, recessionary pressures, and potential return of coronavirus-related restrictions.
Second, we continue to believe well-capitalized players with optimized to-go platforms will be positioned to gain market share amid this traffic volatility. Darden sent a clear signal about its financial strength by repaying the $750 million credit facility it had previously drawn from on May 5 due to "increased confidence in our cash flow projections and stabilization in the credit markets." This leaves Darden with $700 million in cash, which provides it with sufficient liquidity, even as its weekly cash burn rate gradually rises from its current $10 million pace due to dining room reopenings. Weekly to-go sales have stabilized at between $45,000 and $50,000 per restaurant at Olive Garden and $22,000 and $27,000 per restaurant at LongHorn. While we expect to-go volatility the next several months, we believe best practices developed during coronavirus-related restrictions will allow Darden to outperform many of its peers in this channel.
There is no change to our $95 fair value estimate based on recent sales trends, and we see shares as undervalued.
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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.