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Morningstar | Darden Continues to Offer a Blueprint for Today's Casual Dining Chains but Reflected in Market Price

There wasn't much more that Darden investors could ask for in its start to fiscal 2019, with first-quarter comps of 3.3% outperforming the casual-dining industry (headlined by 5.3% comps at Olive Garden) and 20 basis points of EBITDA margin expansion to 18.2% despite wage rate inflation and a 50-basis-point hit due to mark-to-market manager equity awards. While casual dining has had a relatively strong summer, we believe it would be a mistake for investors to chalk up Darden's outperformance to industry trends. Instead, we continue to attribute its strength to menu mix innovations (new appetizers and small plates), daypart expansion opportunities (new lunch entrees and promotional strategies designed to extend peak-hour capacity), accessible menu pricing generally running behind the category's 2%-3% pricing increases), and ongoing awareness of off-premises sales (which grew to 13% at Olive Garden and represented 13% of the revenue mix).

With the strong start to the year, we find Darden's updated full-year 2019 outlook as realistic if not slightly conservative. This includes new revenue growth targets of 5.0%-5.5%, blended comps of 2.0%-2.5%, 45-50 new restaurant openings (3% unit growth), and diluted EPS of $5.52-$5.65. Although guidance implies decelerating comps as the year progresses and a longer integration process for Cheddar's than some investors had anticipated, we still perceive Darden as one of the most reliable names in casual dining. While we expect rivals to replicate its current strategies--the basis of our no-moat rating--we remain comfortable with our five-year projections, including 6% top-line growth (2%-3% comps, 3%-4% unit growth) and operating margins growing to the low 11s (versus 9.4% in fiscal 2018). We see shares as fairly valued--we're planning a modest increase to our $105 fair value estimate for the first-quarter strength--but see operational momentum and its capital returns keeping the stock in favor over the foreseeable future.