Tax Reform Drives EPS Upside for Darden

Ahead of its presentation at the 2018 ICR Conference,

Factoring in the tax reform benefits beyond 2018, as well as the workforce investments (which will likely bring full-year operating margins to the high-9% range from our prior forecast of 10%), we’re planning a modest increase to our $92 fair value estimate. Management left the rest of its full-year outlook intact--including comps of 2%, 40 net new openings, and total sales growth of 13%--which appears realistic and perhaps conservative if we see a positive consumer spending impact coming out of the recent tax reform. We’ll wait until management’s ICR presentation to shore up our estimates, but we still see a path to low-11% operating margins over the next five years through sales leverage and other operational efficiency investments. We make no change to our no-moat rating following the announcement, as we expect other casual dining rivals to deploy tax benefits to implement many changes that Darden has put in place. While we view shares as fairly valued, we still expect positive sales momentum over the next few quarters and view the stock as a solid capital-allocation play.

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