Analyst Note| Erin Lash, CFA |
Darden announced third-quarter earnings that included a more modest revenue decline than we had anticipated, down 26.1% (compared with our forecast of a 30.3% decline). The rollout of COVID-19 vaccines has led to increased traffic in restaurants, which helped boost operating margins for the quarter to 8.5% versus our 7.0% estimate. Despite the improvement, fixed cost deleveraging has kept operating margins below pre-COVID-19 averages of 9%-10%. However, as of March 21, 99% of Darden’s restaurants were open with at least limited dining capacity, up from 80% at the end of the second quarter, and we think further improvement in sales and margins is likely in the cards. As such, we anticipate a low-single-digit increase to our $104 fair value estimate. But after a mid-single-digit rise on the print, we view shares as rich, trading more than 30% above our valuation.