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Darden (DRI) Strong on Sales Initiatives Despite Headwinds

Zacks Equity Research

On Aug 14, we issued an updated research report on the casual dining restaurant chain, Darden Restaurants, Inc. DRI.

Cheddar’s Acquisition a Key Positive

In Apr 2017, Darden completed the acquisition of small restaurant chain, Cheddar's Scratch Kitchen (Cheddar's), in an all-cash deal worth $780 million. Excluding certain expenses, it anticipates the transaction to be accretive to its adjusted per share in fiscal 2018 by roughly 12 cents per share.

Darden believes that this addition will allow it to further fortify two of its most vital competitive advantages – considerable scale as well as wide-ranging data and insights – going ahead.

In fact, as the company progresses with the integration of Cheddar’s, it gains more confidence in its synergy estimates. Management now expects to realize synergies of $22 million to $27 million by the end of fiscal 2019 (up from previously projected range of $20 million to $25 million).

Efforts Taken at Other Brands to Boost Sales

In order to boost the performance of the Olive Garden brand, the company has implemented a set of initiatives under its Brand Renaissance Plan. These include simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, developing new core menu items, allowing customization and making smarter promotional investments.

Also, the brand is focusing on remodeling, bar refreshes as well as technology-driven initiatives. These initiatives include the system wide rollout of tablets, launch of mobile ordering, the To Go business as well as catering in the U.S, and are expected to add to its top line.

At LongHorn, Darden strives to attract guests by focusing on core menu, culinary innovation and providing regional flavors. It is also working on its marketing strategy to improve execution; customer relationship management and digital advertising as well as a strong promotional pipeline that leverages the segment’s expertise.

Cost Saving Endeavors Bode Well

The company is focusing on an aggressive cost management plan, under which it has been able to significantly cut operating costs. This would help it boost profits and gain financial flexibility amid a soft consumer spending environment.

In fact, for fiscal 2018, the company expects 10-40 basis points year-over-year margin expansion as a result of cost savings.

Moreover, Darden plans to reinvest any incremental savings into pricing and long-term growth drivers for the business, particularly emphasizing on enhancing quality to drive market share gains.

Some Headwinds Still Persist

Over the last few quarters, the U.S. restaurant space has not been too enticing. Evidently, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the second quarter of 2017 marked the sixth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. As a result, the company’s sales have come under pressure.

It should also be noted that while several other restaurateurs including Yum! Brands, Inc. YUM, McDonald’s Corporation MCD and Domino’s Pizza, Inc. DPZ have opened their outlets in the emerging markets, Darden seems to be slow on this front.

In addition, the collapse of the Republican-led bill, which was intended to replace Obamacare, means that the Affordable Care Act is here to stay. This implies that the restaurant operator will have to continue shouldering increased labor costs, which in turn will hurt margins. Further, the non-franchised model makes the company susceptible to increased expenses.

Bottom Line

Despite the prevalent headwinds, most of Darden’s brands have been witnessing growth for the last few quarters, given various sales initiatives like operational excellence, menu innovation along with technology-driven moves.

Moreover, the acquisition of Cheddar's has added an undisputed casual dining value leader to the company’s portfolio of differentiated brands, which might further drive comps and resultantly sales.

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