DRI Darden Restaurants
Best-in-class casual diner, but mature; even after the pullback, the price still leaves no margin of safety.
The story
Darden is the scale leader in US casual dining. Olive Garden and LongHorn give it purchasing, advertising and real-estate advantages that smaller chains can't match. It is a mature cash generator that grows mid-single digits through new units, modest comps and bolt-on acquisitions like Chuy's. It returns most of its free cash flow to shareholders. LongHorn is now carrying comps while Olive Garden's traffic fades, which fits a franchise late in its life cycle rather than one with a long reinvestment runway.
No facts changed materially, so all drivers stay as before. TTM margin rose to 12.0%, which supports the 12.5% target through scale and cost leverage, but it is not a reason to go higher given casual-dining labor and commodity pressure. Growth of 6.5% blends about 2% unit growth, low comps and acquisition tail. The 2.89 sales-to-capital ratio matches history.
Value drivers
| Revenue growth (Y1) | 6.5% |
| Terminal growth | 2.5% |
| Forecast horizon | 8y |
| Target operating margin | 12.5% |
| Years to target margin | 3 |
| Sales-to-capital | 2.89 |
| Beta | 0.95 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 9.2% |
| Terminal WACC | 9.4% |
Valuation bridge
| PV of explicit FCFF | 8.38B |
| PV of terminal value | 12.67B |
| Equity value | 18.71B |
| ÷ shares → per share | $164.83 |
News
neutral +0.10 · 8 articles
- Darden’s Sales Rise as Olive Garden Targets Lunch Comeback
- Darden (DRI): LongHorn Keeps Carrying the Portfolio While Olive Garden’s Growth Fades
- McDonald's US Comparable Sales Seen Pressured Through Year-End Amid Tough Comparisons, Morgan Stanley Says
- McDonald’s and Fast Food Are a Mess. Look at These Stocks Instead.
- Brinker Leans Into Chicken, Kids and Desserts: Can It Keep Growing?
- Darden Restaurants (DRI) Stock May Be 13% Undervalued After Q1 Earnings Miss
- Olive Garden forced to pause summer ad push for unlimited soup, salad and breadsticks after deadly outbreak spooked U.S.
- Better Dividend Bet: DRI or SBUX? The Cash Flow Numbers Reveal a Clear Winner
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 14.07B | 6.5% | 12.2% | 1.50B | 297.13M | 1.20B | 1.10B |
| 2 | 14.90B | 5.9% | 12.3% | 1.61B | 288.63M | 1.32B | 1.11B |
| 3 | 15.70B | 5.4% | 12.5% | 1.72B | 276.27M | 1.44B | 1.11B |
| 4 | 16.45B | 4.8% | 12.5% | 1.80B | 260.02M | 1.54B | 1.08B |
| 5 | 17.15B | 4.2% | 12.5% | 1.87B | 239.93M | 1.63B | 1.05B |
| 6 | 17.77B | 3.6% | 12.5% | 1.94B | 216.14M | 1.73B | 1.02B |
| 7 | 18.32B | 3.1% | 12.5% | 2.00B | 188.87M | 1.81B | 980.07M |
| 8 | 18.78B | 2.5% | 12.5% | 2.05B | 158.46M | 1.89B | 937.51M |
Key risks
- Olive Garden traffic erosion as value-focused fast food and fast-casual compete for the same customers
- Wage and beef/commodity inflation compressing margins below 12%
- Lease-adjusted leverage (6.3B gross debt) limits flexibility in a consumer downturn
Catalysts
- Olive Garden lunch and value push restoring positive traffic
- Chuy's integration synergies and LongHorn unit expansion lifting consolidated margin