Darden Delivers Appetizing Quarter, With An Acquisition On The Side

Darden Restaurants, Inc. DRI reported its 2017's fiscal third-quarter results ahead of expectations, while raising its 2017 EPS guidance and announcing that it has entered into an agreement to acquire Cheddar’s Scratch Kitchen.

Baird’s David E. Tarantino maintains a Neutral rating on Darden Restaurants, with a price target of $80.

Beat Quarter And Guidance

For Q3 2017, the company reported its EPS at $1.32, representing 9-percent growth and ahead of the estimate and consensus, driven by a marginal EBIT upside and positive tax rate variance.

Revenues for the quarter grew 1.7 percent, again ahead of the consensus forecast, driven by 0.7 percent increase in total units and blended comps of 0.9 percent.

The EBIT margin declined 8 bps to 12.2 percent, including a 20 bps decline in restaurant margin and G&A (general and administrative expenses) decline of 19 bps.

Darden Restaurants raised its 2017 from $3.87–$3.97 to $3.95–$4.00, on blended comps of close to 1.5 percent.

“The outlook implies FQ4 EPS of $1.11–1.16 on comps near +2 percent,” Tarantino mentioned.

Acquisition

The analyst expressed “mixed feelings” regarding the announced acquisition, “with the benefits associated with adding another long-term growth vehicle for the company balanced by risks related to increased operating complexity.”

“Cheddar's Scratch Kitchen is a casual dining growth concept focused on providing high-quality, made-from-scratch food at a compelling value and in a polished/warm environment,” Tarantino explained.

The analyst pointed out that the brand currently had 165 locations, with a 10-year unit CAGR (compound annual growth rate) of more than 10 percent, across 28 states, with robust average unit volumes of $4.4 million.

Darden Restaurants will pay $780 million for Cheddar’s Scratch Kitchen, which the analyst expects to be funded by existing cash and incremental debt.

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