Darden Earnings: Persistent Industry Outperformance Encouraging, but Valuation Looks Inflated

Narrow-moat Darden Restaurants DRI continues to fire on all cylinders, with its portfolio of full-service restaurants outperforming full-service industry same-store sales benchmarks by 610 basis points during its fiscal fourth quarter. Sales of $2.8 billion and diluted EPS of $2.58 were in line with our forecasts for $2.8 billion and $2.50, respectively. We expect to increase our $143 fair value estimate by a low-single-digit percentage, consistent with time value. We also plan to adjust our Uncertainty Rating to Medium from High, consistent with our quantitative methodology. However, Darden’s valuation continues to look stretched to us, with the shares trading at a 12%-13% premium to our revised fair value estimate.

Darden’s strategy to underprice inflation has been validated by ongoing gains in traffic share. The company is one of only a couple of restaurant operators to recover to prepandemic restaurant-level EBITDA margins or better. Its 20.7% quarterly margin healthily edged its 18.5% average during the three years leading up to COVID-19, and despite our expectation for modest normalization in fiscal 2024, we expect structurally higher unit-level profits, as management has remained judicious in its marketing spending even as traffic has softened. While the next 12 months figure to be challenging for restaurateurs, with most industrywide expectations (including our own) calling for GDP-level nominal growth and ongoing visitation declines, Darden continues to look proportionately well positioned and expects modest same-store sales growth (2.5%-3.5%) in the year to come as it leans into its value positioning.

We view the firm’s midterm target for 10%-15% annual total shareholder returns as attainable, albeit barely; we forecast 8% EPS growth and 2% average annual share repurchases over the next five years.