EUR 850.00 For Business Accounts Only

Morningstar | Darden Menu/Operational Improvements Driving Customer Engagement, Support Our Long-Term Assumptions

We found Darden's second-quarter update noteworthy not just for its continued momentum--blended comps of 2.1% outpaced the industry's 1.2% increase (using Knapp-Track estimates) and 40 basis points of adjusted EBIT margin expansion to 7.5%--but also signs of brand strength at Olive Garden and LongHorn. Olive Garden's comparable transactions (down 0.8%) fell more than the industry average (down 0.2%) as it deliberately pulled back on promotions (citing the health of the industry), but brand comps of 3.5% still outpaced the industry. We take this as a sign of greater engagement among customers, which we attribute to ongoing menu mix innovations (including a larger-portion chicken Alfredo entree), redesigned menus showcasing everyday value pricing, and off-premises gains (which grew 10% and represented 14.6% of sales). We've also been impressed by LongHorn's traction through simplified menu and operations and improved preparation processes, which helped drive healthy 2.9% comps.

With the strong first half, Darden's updated full-year 2019 outlook looks achievable, assuming we don't see a more pronounced cyclical downturn in early 2019. This includes revenue growth of 5.0%-5.5%, blended comps of 2.5% (up from 2.0%-2.5%), 45-50 new restaurant openings (3% unit growth), and diluted EPS of $5.60-$5.70 (previously $5.52-$5.65). Although guidance implies decelerating second-half core brand comps and Cheddar's integration has taken longer than some investors anticipated (though we're optimistic about recent leadership realignment efforts), we believe operational momentum and its capital returns will keep the stock in favor over the foreseeable future. While we expect rivals to replicate its current strategies--the basis of our no-moat rating--the assumptions underpinning our $108 fair value estimate remain intact, including 6% top-line growth (2%-3% comps, 3%-4% unit growth) and EBIT margins growing to the low 11s (versus 9.4% in fiscal 2018) the next five years.