EUR 850.00 For Business Accounts Only

Morningstar | Menu Changes, Streamlined Operations, and Off-Premises Sales Make Darden a Casual Dining Standout

In what remains one of the casual dining restaurant industry's more impressive turnaround stories, Darden continues to execute on a number of structural and operational strategies after the 2014 election of a Starboard-led board. Under the leadership of CEO Gene Lee, Olive Garden has delivered revenue growth and margin improvements through a streamlined menu with more-compelling entry prices but also add-on opportunities; improved restaurant operations and speed due to simplified processes and greater use of technology; and an infrastructure facilitating off-premises growth avenues like takeout, delivery, and catering. While Olive Garden's strategies won't entirely apply to the entire Darden portfolio, we believe they will collectively improve the company's position in what has become a more competitive casual dining space, marked by heavy promotional activity and fast-casual competition, which, in our view, has influenced industry pricing power.After spinning off company-owned Olive Garden real estate to a REIT (Four Corners Property Trust), management has more recently focused on optimizing its brand portfolio. This includes the 2017 acquisition of Cheddar's, an American "made-from-scratch" casual dining concept. We believe Cheddar's value reputation, restaurant layout, and target audience complement Darden's portfolio and offer customer data/menu construction synergies, improved bargaining clout with suppliers and landlords, and other cost-reduction opportunities. While additional leverage from the Cheddar's transaction likely limits near-term acquisitions, we would not be surprised to see smaller complementary deals or divestitures of noncore brands in the future.We expect Darden to return to peak operating margins of 11%-12% in the next few years (ahead of industry averages in the high single digits). However, we remain concerned that competition from other casual dining chains (many of which are adopting Darden's best practices) and upscale fast-casual chains will become more pronounced over a longer horizon, requiring Darden to deploy more aggressive pricing or format changes to keep pace and potentially affecting profitability.