Uber Direct And New Restaurant Formats Will Transform Casual Dining

Key Takeaways

• Seamless integration of Uber Direct in Olive Garden locations enhances convenience, expected to boost sales and average check size over time.
  
• Smaller prototypes for Yard House and Cheddar's Scratch Kitchen reduce costs and speed up openings, potentially accelerating unit growth and earnings.
  
• Declining guest counts and economic factors could pressure revenue growth, while operational complexities and supply chain disruptions threaten net margins.

Catalysts

Owns and operates full-service restaurants in the United States and Canada.

• Olive Garden's rollout of Uber Direct delivery service has been seamless and is now available in nearly all locations. This provides a meaningful sales-building opportunity over time as consumers increasingly opt for convenience, potentially boosting revenue and average check size.
  
• LongHorn Steakhouse's emphasis on quality and culture, such as the Grill Master Legend's program, continues to drive momentum. This level of focus has resulted in all-time high quality scores, potentially leading to increased customer loyalty and stronger comparable sales, positively impacting net margins.
  
• Darden is testing new smaller prototypes for some brands, such as Yard House and Cheddar's Scratch Kitchen. These prototypes lower construction costs and expedite new restaurant openings, enabling a potential acceleration in unit growth which should enhance revenue and earnings.
  
• The integration of Chuy's into Darden's operations promises efficiencies such as streamlined HR and supply chain processes, which could yield productivity gains and improve net earnings.
  
• Darden's strategic reintroduction of popular Olive Garden promotions, like the buy one take one offer and limited-time menu items, aims to drive foot traffic and maintain consumer interest, likely boosting revenue while leveraging existing menu items to maintain net margins.

Darden Restaurants Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Darden Restaurants's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.0% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $12.62) by about April 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 23.2x today. This future PE is lower than the current PE for the US Hospitality industry at 23.2x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Darden Restaurants Future Earnings Per Share Growth

Risks

• The casual dining industry is experiencing a decline in average same-restaurant guest counts, which may be indicative of underlying consumer spending challenges or shifts in dining preferences, potentially impacting Darden's future revenue growth.
  
• Despite the delivery channel rollout, the incrementality of delivery orders is still relatively low (40-50%), and the increase in operational complexity could pressure net margins if it fails to scale efficiently.
  
• Economic factors, such as the decline in consumer confidence and potential impacts from tariffs, could curb discretionary spending in the mid-to-lower income brackets, affecting the earnings of brands like Olive Garden and LongHorn, which are sensitive to economic downturns.
  
• A substantial portion of Darden's commodity costs is domestic, but any unforeseen disruptions in supply chain dynamics could affect food costs, leading to volatile net margins.
  
• High margin levels at Olive Garden are above historical expectations, which may not be sustainable if management opts to invest more aggressively in marketing and operational improvements to maintain growth, potentially impacting net earnings.

Valuation

• The analysts have a consensus price target of $208.385 for Darden Restaurants based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $238.0, and the most bearish reporting a price target of just $145.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.1 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 8.5%.
• Given the current share price of $209.54, the analyst price target of $208.39 is 0.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.