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Darden Restaurants Inc DRI

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Morningstar’s Analysis

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Q2 Sales Strength and Margin Headwinds Par for the Course; Darden Taking Appropriate Strategic Steps

Sean Dunlop Equity Analyst

Analyst Note

| Sean Dunlop |

We take a neutral view of narrow-moat Darden's second-quarter earnings, with strong sales growth and persistent margin headwinds commanding attention. The firm's system sales and operating income was largely in line with our ex ante forecasts, but leverage came from unforeseen areas--marketing, which remained nearly 200 basis points below the historical run rate at 1% of sales, and general and administrative spending. These were offset by higher labor (100 basis points, sequentially) and food goods (70 basis points sequentially) costs, driving a 210-basis-point quarterly decline in restaurant-level margin, to 18.8%. While we expect food cost normalization during the next calendar year, elevated labor expenditures look stickier, with management raising its minimum tipped wage to $12 an hour as of January 2022, driving average wages of $20 across its portfolio. We expect to maintain our $128 fair value estimate, with near-term margin pressures already baked into our forecasts to some extent, and otherwise offset by a combination of better-than-anticipated comparable store sales growth (up 8.8% during the quarter from precoronavirus figures), strategic price increases (3% expected in fiscal 2022), and meaningfully lower near-term marketing expenditures than we initially foresaw. Shares trade at a high-single-digit premium to our fair value estimate after a 4%-5% correction post-print.

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Company Profile

Business Description

Darden Restaurants is the largest restaurant operator in the U.S. casual and fine dining markets, with consolidated revenue of $7.2 billion in fiscal 2021 resulting in 3.8% market share (per Euromonitor data and our calculations). The company maintains a portfolio of eight restaurant chains: Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Eddie V’s, and Bahama Breeze. Darden generates revenue almost exclusively from company-owned restaurants, though a network of 64 franchised restaurants and consumer-packaged goods sales through the traditional grocery channel contribute modestly. As of the end of Darden's fiscal 2022 second quarter, the company owned 1,852 restaurants in the U.S.

1000 Darden Center Drive
Orlando, FL, 32837
T +1 407 245-4000
Sector Consumer Cyclical
Industry Restaurants
Most Recent Earnings Nov 30, 2021
Fiscal Year End May 31, 2021
Stock Type Cyclical
Employees 156,883