Olive Garden's Menu Revamp And Chuy's Integration Will Drive Earnings Growth And Boost Margins

Key Takeaways

• Olive Garden's menu initiatives and delivery expansion may boost same-restaurant sales, positively impacting revenue.
  
• LongHorn Steakhouse and Cheddar's operational improvements enhance revenue and margins, supporting earnings growth.
  
• Disruption from hurricanes and integration challenges may impact net margins, while limited marketing and supply concerns could pressure sales growth and food expenses.

Catalysts

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

• Olive Garden is poised for growth with new menu initiatives, such as the return of popular entrees and the upcoming Uber Direct delivery pilot expansion, which may drive positive same-restaurant sales, impacting revenue.
  
• LongHorn Steakhouse continues to capitalize on strong execution in high-quality steaks and operational improvements, driving superior same-restaurant sales growth, impacting revenue and margins positively.
  
• Cheddar's Scratch Kitchen demonstrated operational efficiencies, leading to improved retention and value perceptions, potentially contributing to margin improvement and growth in earnings.
  
• The integration of Chuy’s onto the Darden platform is expected to yield synergies by fiscal 2026, supporting earnings growth.
  
• Investment in modernizing their point-of-sale system and leveraging technology could streamline operations, enhance data insights, and potentially boost margins over time.

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 9.9% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $12.27) by about January 2028, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.8x on those 2028 earnings, down from 21.0x today. This future PE is lower than the current PE for the US Hospitality industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 1.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.2%, as per the Simply Wall St company report.

Darden Restaurants Future Earnings Per Share Growth

Risks

• The impact of hurricanes Helene and Milton disrupted operations and caused damage to at least one restaurant, indicating potential future risks from natural disasters and impact on revenue.
  
• Negative same-restaurant sales in the Fine Dining segment, even when adjusted for the Thanksgiving shift, suggest challenges in this sector that could impact earnings.
  
• Ongoing integration challenges with the acquisition of Chuy's and rollout of new systems may lead to disruptions and additional costs, potentially affecting net margins.
  
• Limited marketing spend across brands, particularly LongHorn, could reduce competitive visibility and pressure sales growth and revenue in a highly competitive market.
  
• Reluctance among beef packers to quote prices due to supply concerns may result in increased commodity costs, impacting food expenses and net margins.

Valuation

• The analysts have a consensus price target of $193.25 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 $223.0, 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 $13.9 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 19.8x, assuming you use a discount rate of 8.2%.
• Given the current share price of $186.69, the analyst's price target of $193.25 is 3.4% higher. 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.