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Purchase Spurs New Growth Opportunities for Darden

Cheddar's value reputation, restaurant layout, and target audience complement the company's existing portfolio.

Securities In This Article
Darden Restaurants Inc
(DRI)

While no-moat

Darden plans to purchase Cheddar's--a 165-unit American "made from scratch" casual-dining concept in 28 states--from L Catterton and Oak Investment Partners for $780 million (10.4 times trailing 12-month EBITDA). The transaction will be funded by new debt (leaving it with a reasonable adjusted debt/EBITDAR ratio of 2.3 times) and expected to close in the upcoming quarter. The deal is expected to be accretive to 2018 EPS by $0.12 and 2019 EPS by $0.20-$0.25, excluding acquisition/integration expenses. We don't find the announcement terribly surprising, as there had been market rumors that Darden was looking to add to its brand portfolio. Moreover, we believe Cheddar's value reputation, restaurant layout, and target audience complement Darden's existing portfolio and offer customer data/menu construction synergies, improved bargaining clout with suppliers and landlords, and other cost-reduction opportunities.

Factoring in the acquisition and expected synergies, we plan to add roughly $6 to our $68 fair value estimate, implying the market is appropriately valuing Darden. With three quarters of the year in the books, we find the updated full-year 2017 outlook--sales growth of 2.3%, comps of 1.5%, and EPS of $3.95-$4.00--realistic. With Cheddar's in tow, we have greater conviction in our five-year forecasts calling for mid-single-digit top-line growth and operating margins pushing 11%, with wage increases/tax law changes across the U.S. helping to offset persistent category competition.

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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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