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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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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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