Darden's Momentum Should Continue
Guest experience, menu management, off-premise sales, and operational simplification should continue to drive growth for the casual-dining chain.
We plan to increase our $75 fair value estimate around 10% as we incorporate more optimistic near-term top-line growth assumptions, adjust for time value of money, and assume a lower long-term tax rate stemming from U.S. tax reform. While we believe Darden is priced appropriately relative to our updated FVE, we view management's fiscal 2018 guidance--comp growth of 1%-2%, total revenue growth of 11.5%-13.0%, adjusted EPS of $4.38-$4.50 excluding $0.06-$0.08 of Cheddar's integration costs--as conservative despite more difficult comparisons and setting the stage room for upside surprises. Over the next five years, our model assumes organic top-line growth of around 6% with adjusted operating margins improving from 10% in fiscal 2016 to almost 12% by fiscal 2022, with profitability driven by operational efficiencies and improving store economics and synergies from Cheddar's (consistent with our third-quarter note, management raised its forecast annual synergy to $22 million-$27 million starting in fiscal 2019 from $20 million-$25 million).
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