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Darden Restaurants Inc DRI

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Darden Delivers Strong Results in Continued Challenging Environment; Shares Modestly Overvalued

Erin Lash, CFA Sector Director

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.

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Company Profile

Business Description

Darden is one of the largest players in the $185 billion U.S. casual dining industry. Olive Garden (874 units), LongHorn (527), and Cheddar's Scratch Kitchen (168 company-owned units) are its core brands, while the smaller, faster-growing specialty restaurant group is made up of Yard House (81), The Capital Grille (60), Seasons 52 (43), Bahama Breeze (41), and Eddie V's (24). In November 2015, the company spun off selected real estate and restaurant assets into Four Corners Property Trust.

Contact
1000 Darden Center Drive
Orlando, FL, 32837
T +1 407 245-4000
Sector Consumer Cyclical
Industry Restaurants
Most Recent Earnings Feb 28, 2021
Fiscal Year End May 31, 2021
Stock Type Cyclical
Employees 177,000

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