Morningstar

Darden's Momentum Should Continue

Guest experience, menu management, off-premise sales, and operational simplification should continue to drive growth for the casual-dining chain.

Securities In This Article
Darden Restaurants Inc
(DRI)

We plan to increase our $75 fair value estimate around 10% as we incorporate more optimistic near-term top-line growth assumptions, adjust for time value of money, and assume a lower long-term tax rate stemming from U.S. tax reform. While we believe Darden is priced appropriately relative to our updated FVE, we view management's fiscal 2018 guidance--comp growth of 1%-2%, total revenue growth of 11.5%-13.0%, adjusted EPS of $4.38-$4.50 excluding $0.06-$0.08 of Cheddar's integration costs--as conservative despite more difficult comparisons and setting the stage room for upside surprises. Over the next five years, our model assumes organic top-line growth of around 6% with adjusted operating margins improving from 10% in fiscal 2016 to almost 12% by fiscal 2022, with profitability driven by operational efficiencies and improving store economics and synergies from Cheddar's (consistent with our third-quarter note, management raised its forecast annual synergy to $22 million-$27 million starting in fiscal 2019 from $20 million-$25 million).

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About the Author

R.J. 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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