Darden Restaurants, Inc.

Transcription

1 Darden Restaurants, Inc. DRI: Reports Solid Performance; Expectations Were Pretty High Despite Evidence Segment Is Slowing Our View: We reiterate our OW rating following shares coming under pressure because F4Q16 SRS (+1.7%, +2.5% Street) and FY17 EPS guidance ($ , $3.99 Street) fell short of expectations. Our thesis remains intact: 1) Olive Garden SRS were positive and maintained solid outperformance, despite more aggressive promotions by competitors; 2) FY17 EPS guidance seems prudent given the softening segment sales, with potential upside coming from commodity prices remaining favorable and share repurchases ($315M remaining on authorization); and 3) strong credit combined with compelling dividend characteristics should attract income investors. Key Investment Points Olive Garden's SRS out-performance continues. OG's calendar SRS during F4Q was ~380 bps higher than the CDR average, with the final period, May, out-performing by 460 bps; these results approximate the prior quarter out-performance (~420 bps in F3Q), and compare favorably on a 2-year stacked basis. This out-performance strengthens our conviction management's plan (focused on better operational execution, everyday value platforms, and off-premise sales) can deliver sustained SRS gains. During F4Q, OG's To Go platform increased 19% YOY, lapping 23% growth from F4Q15. The To Go platform now accounts for 10.8% of OG's sales, up 140 bps YOY. We continue to believe offpremise sales have the potential to deliver 1-2% annual SRS growth at OG and a material portion of the 8% total EBITDA growth projected for DRI. FY17 guidance appropriate. In light of the weak industry sales, the Company was prudent in assuming 1-2% SRS growth, slightly below the long-term target (1-3%); we were encouraged FY17 EPS growth guidance of 8-10% was also within the longterm target. EPS guidance could prove conservative if commodity deflation continues (management assumes inflation in F2H17, but is floating most of its needs for F2H17) and the Company remains active with its share repurchase activity (guidance assumes 128.5M shares outstanding, vs. KBCM 127.1M outstanding). Our $3.90 estimate for FY17 is unchanged and we initiated a FY18 EPS estimate of $4.30, implying 10% EPS growth. Compelling dividend income stock. DRI announced a 12% increase in its quarterly dividend to $0.56/sh., which is now ahead of the $0.55/sh. dividend paid prior to the sale of Red Lobster and the REIT spin-off. Darden has regained investment grade credit ratings from all 3 agencies and plans to maintain adjusted leverage in the x range (F4Q16 was at the low end of the range). DRI currently has the highest dividend yield (3.5%) among restaurant companies that are growing their dividend at a double-digit rate. We project FCF to approximate $500M in FY17, which yields 6% on its EV. Estimates FY ends 5/31 F2016A 1Q17E 2Q17E 3Q17E 4Q17E F2017E F2018E EPS (Net) $3.53 $0.81 $0.60 $1.35 $1.14 $3.90 $4.30 Consumer: Restaurants / (615) cocull@key.com David Carlson / (615) dcarlson@key.com 10 NYSE: DRI Rating: Overweight Price Target: $80.00 Price: $ Aug-15 Vol (mil) Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. Company Data DRI 52-week range $53 - $69 Market Cap. (M) $8,185.6 Shares Out. (M) Enterprise Value (M) $8,400.9 Avg. Daily Volume (30D) 1,905,730.0 Annual Dividend $2.24 Dividend Yield 3.5% SI as % of Float 11.2% Book Value/Share $15.23 Sources: Company reports, FactSet, KeyBanc Capital Markets Inc Cons. EPS $3.52 $0.83 $0.66 $1.34 $1.18 $ Previous $3.48 $0.76 $0.64 $1.31 $ Valuation P/E 18.1x x 14.8x Sources: Company reports, FactSet, KeyBanc Capital Markets Inc. For analyst certification and important disclosures, please refer to the Disclosure Appendix. KeyBanc Capital Markets Inc. Member NYSE/FINRA/SIPC

2 Valuation Investment Risks Our 12-month $80 target price is based on a DCF analysis and implies DRI trades at 9-10x NTM EV/EBITDA one year from now, compared to 8x currently and 8x CDR median. On an EV/sales basis, our target price assumes DRI trading at 1.4x NTM one year from now (vs. 1.2x currently and 1.1x segment median). We believe a premium valuation is warranted given the SRS and traffic out-performance relative to the casual dining segment, as well as DRI's strong free cash flows that are expected to be returned to shareholders. We believe specific risks to Darden investors and that may impede the stock from achieving our price target include, but are not limited to, the following: 1) Olive Garden's sales-building initiatives do not resonate with guests, causing SRS to remain negative and EPS to fall short projections; and 2) a slowdown in consumer spending results in cash flows falling short of expectations. Pg.2

3 Figure 1 Olive Garden Gap-to-Knapp 6.0% 5.0% 3.0% 2.0% 1.0% Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 OG Gap-to-Knapp Note: Calendar SRS as reported by the Company Source: Company reports, Knapp-Track and KeyBanc Capital Markets Inc. Pg.3

4 Figure 2 Results: Actual vs. Projected F4Q16 Actual KBCM Est F4Q15 Actual Total revenue $ 1,790.2 $ 1,797.1 $ 1,878.3 bps bps Food and beverage % % (50) % (130) Restaurant labor % % (10) % (3) Restaurant expenses % % % 152 Restaurant profit % % % (18) General and administrative (ex. 1x) % % (18) % (18) Depreciation and amortization % % % (58) Operating income % % (15) % 57 Interest, net % % (2) % (74) Asset impairment % % (5) Pre-tax income % (24) % 135 Income taxes % % (55) % 85 Net earnings $ % $ % 32 $ % 50 EPS from continuing operations $ 1.10 $ 1.05 $ 1.07 Diluted shares outstanding Tax rate % 13.1% Source: Company reports and KeyBanc Capital Markets Inc. estimates Figure 3 EPS Surprise EPS Impact Restaurant sales (0.01) Restaurant profit 0.01 Selling, general and administrative 0.02 Depreciation and amortization expense (0.04) Total Operating Income Surprise (0.02) Impairment (0.01) Interest expense 0.00 Income taxes 0.07 Diluted shares outstanding 0.00 Total Beat (Miss) 0.05 Source: Company reports and KeyBanc Capital Markets Inc. estimates Pg.4

5 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12A 4Q12A 1Q13A 2Q13A 3Q13A 4Q13A 1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16A 1Q11A 2Q11A 3Q11A 4Q11A 1Q12A 2Q12A 3Q12A 4Q12A 1Q13A 2Q13A 3Q13A 4Q13A 1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16A Figure 4 SRS: One-year and Two-year Cumulative Trend Olive Garden 8.0% 6.0% 2.0% -2.0% % -8.0% 1 5.0% -5.0% % SRS - Olive Garden 2-yr. cum. SRS (right axis) Source: Company reports and KeyBanc Capital Markets Inc. Figure 5 SRS: One-year and Two-year Cumulative Trend LongHorn Steakhouse 8.0% 7.0% 6.0% 5.0% 3.0% 2.0% 1.0% -1.0% -2.0% -3.0% % 1 8.0% 6.0% 2.0% -2.0% % SRS - LongHorn Steakhouse 2-yr. cum. SRS (right axis) Source: Company reports and KeyBanc Capital Markets Inc. Pg.5

6 Darden Restaurants Earnings Model ($ in millions, except per share) Fiscal Year End: May 1Q15A 2Q15A 3Q15A 4Q15A 2015A 1Q16A 2Q16A 3Q16A 4Q16A 2016A 1Q17E 2Q17E 3Q17E 4Q17E 2017E Total revenue $ 1,595.8 $ 1,559.0 $ 1,730.9 $ 1,878.3 $ 6,764.0 $ 1,687.0 $ 1,608.8 $ 1,847.5 $ 1,790.2 $ 6,933.5 $ 1,712.5 $ 1,669.3 $ 1,861.4 $ 1,827.3 $ 7,070.5 % change 4% 5% 7% 14% 8% 6% 3% 7% (5%) 3% 2% 4% 1% 2% 2% Food and beverage , , ,054.7 Restaurant labor , , ,233.0 Restaurant expenses , , ,240.6 Restaurant profit $ $ $ $ $ 1,422.5 $ $ $ $ $ 1,541.1 $ $ $ $ $ 1,542.2 Marketing expenses Stock-based compensation General and administrative (excl stock-based comp) SG&A (est. 1x's) Depreciation and amortization Operating income $ 66.6 $ 18.4 $ $ $ $ $ 89.4 $ $ $ $ $ $ $ $ Interest, net Asset impairment and restructuring charges, net (1.7) 7.7 (2.1) Pre-tax income $ 35.3 $ (5.4) $ $ $ $ $ 60.0 $ $ $ $ $ $ $ $ Income taxes 6.0 (0.3) Earnings from continuing operations $ 42.6 $ 35.7 $ $ $ $ 88.2 $ 70.4 $ $ $ $ $ 76.4 $ $ $ EPS from continuing operations (adj.) $ 0.32 $ 0.28 $ 0.99 $ 1.07 $ 2.63 $ 0.68 $ 0.54 $ 1.21 $ 1.10 $ 3.53 $ 0.81 $ 0.60 $ 1.35 $ 1.14 $ 3.90 Diluted shares outstanding SALES ANALYSIS Olive Garden Same-restaurant sales (1.3%) 0.5% 2.2% 3.4% 1.3% 2.7% 1.0% 6.8% 1.6% 3.1% 1.3% 2.2% 0.5% 1.7% 1.4% 2-year cumulative SRS (5.3%) (0.1%) (3.2%) (0.1%) (2.1%) 1.4% 1.5% 9.0% 5.0% 4.4% 3.2% 7.3% 3.3% 4.5% Ending unit counts % change 1% 1% 1% 1% 1% 0% 0% (0%) (0%) (0%) 0% (0%) 0% 1% 1% LongHorn Steakhouse Same-restaurant sales 2.8% 2.6% 5.4% 5.2% 4.4% 4.4% 2.6% 5.2% 1.1% 3.5% 0.7% 2.8% 1.1% 3.9% 2.1% 2-year cumulative SRS 6.0% 7.6% 5.7% 7.6% 7.1% 7.2% 5.2% 10.6% 6.3% 7.9% 5.1% 5.4% 6.3% 5.0% 5.6% Ending unit counts % change 6% 0.5% 6% 2.1% 6% 3.7% 3% 3% 2.7% 4% 3.2% 1% 1.2% 0% 3.7% 0% 0.7% 0% 2.3% (0%) 1.1% 1% 2.8% 1% 2.3% 2% 3.3% 2% 2.4% PROFIT ANALYSIS Food and beverage 31.5% 31.1% 30.7% 30.2% 30.8% 29.8% % 28.9% 29.4% 28.8% 29.7% 29.0% 28.8% 29.1% Basis point change (45) 72 (165) (118) (155) (130) (141) (100) (30) (15) (3) (36) Restaurant labor 31.9% 32.5% 30.9% 31.1% 31.6% 31.8% 32.6% 31.0% 31.1% 31.6% 31.8% 32.6% 30.9% 31.1% 31.6% Basis point change (23) (58) (50) (71) (52) (8) 5 4 (3) (6) 3 1 Restaurant expenses 17.1% 17.8% 15.9% 15.7% 16.6% 16.1% 17.3% 16.5% 17.2% 16.8% 18.0% 18.8% 16.5% 17.0% 17.5% Basis point change (8) 16 (82) (155) (62) (95) (51) (2) (19) 76 Restaurant margin 19.6% 18.6% 22.5% 23.0% 21.0% 22.3% 20.2% 23.4% 22.8% 22.2% 21.4% 19.0% 23.6% 23.0% 21.8% Basis point change (149) (63) (18) 120 (92) (123) (41) G&A (incl. stock-based comp, excl. est. 1x-acquisition charges) 5.5% 5.5% 4.4% 5.3% 5.1% 5.2% 4.4% 4.8% 5.1% 4.9% 4.7% 4.5% 4.2% 4.5% 4.5% Basis point change (534) (546) (443) (330) (460) (30) (106) 48 (23) (26) (46) 4 (65) (57) (42) Depreciation and amortization 4.9% 5.1% 4.6% 4.3% 4.7% 4.8% 4.7% 3.6% 3.7% 4.2% 4.1% 3.8% 3.9% 3.9% Operating margin 5.2% 10.3% 9.9% 7.5% 8.5% 7.0% 12.3% 10.3% 9.7% 8.7% 6.8% 12.9% 11.1% 1 Net margin 3.1% (0.3%) 6.7% 5.7% 5.0% 3.0% 8.3% 7.8% 6.1% 6.0% 4.6% 9.2% 7.9% 7.0% Source: Company Reports & KeyBanc Capital Markets Estimates Pg.6

7 Darden Restaurants Christopher T. O'Cull Balance Sheet and Cash Flow Model (615) ($ in millions, except per share) ($ in millions, except per share) 2012A 2013A 2014A 1Q15A 2Q15A 3Q15A 4Q15A 2015A 1Q16A 2Q16A 3Q16A 4Q16A 2016A 1Q17E 2Q17E 3Q17E 4Q17E 2017E Balance Sheet: Cash Short-term investments Current assets (excl. cash) PP&E, net 3, , , , , , , , , , , , , , , , , ,081.8 Goodwill and trademarks 1, , , , , , , , , , , , , , , , , ,446.9 Other assets Total Assets 5, , , , , , , , , , , , , , , , , ,648.0 Current liabilities 1, , , , , , , , , , , , , , , , , ,187.1 Long-term debt 1, , , , , , , , , , Deferred income taxes Deferred rent Capital lease obligations Other liabilities Total Liabilities 4, , , , , , , , , , , , , , , , , ,612.4 Common stock 2, , , , , , , , , , , , , , , , ,571.2 Retained earnings 3, , , , , Treasury stock (3,695.8) (8.1) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8) (7.8) (57.8) (107.8) (157.8) (207.8) (207.8) Accumulated other comprehensive income (146.6) (132.8) (128.1) (102.5) (79.8) (77.8) (86.6) (86.6) (85.2) (65.0) (63.3) (87.0) (87.0) (87.0) (87.0) (87.0) (87.0) (87.0) Unearned compensation (7.2) (6.1) (5.2) (4.9) (4.9) (4.4) (4.0) (4.0) (3.7) (3.6) (3.3) (3.3) (3.3) (3.3) (3.3) (3.3) (3.3) (3.3) Total Equity 1, , , , , , , , , , , , , , , , , , Cash Flow: Net income (19.3) (50.1) Losses from discontinued operations (103.0) (5.4) (18.5) (16.1) (15.3) (15.3) Depreciation and amortization Stock-based compensation Other non-cash items included in operations (3.2) Deferred income taxes (33.9) (0.4) Changes in working capital (119.5) (21.2) (68.6) (34.3) (91.0) Cash from Operations Purchase of PP&E (639.7) (685.6) (414.8) (88.6) (167.4) (230.1) (296.5) (296.5) (64.9) (122.2) (172.8) (228.3) (228.3) (58.4) (126.0) (216.1) (318.2) (318.2) Other investing activities (81.9) (604.8) (21.5) 1, Cash from Investments (721.6) (1,290.4) (436.3) 1,898.5 (156.4) (208.8) (235.1) (235.1) (58.4) (126.0) (216.1) (318.2) (318.2) Proceeds from option exercise Dividends paid (223.9) (258.2) (288.3) (72.7) (140.9) (209.3) (278.9) (278.9) (70.0) (140.6) (204.8) (268.2) (268.2) (70.5) (140.7) (210.7) (280.4) (280.4) Purchases of treasury stock (375.1) (52.4) (0.5) (500.6) (502.0) (502.3) (502.3) (502.3) - (0.4) (140.2) (184.8) (184.8) (50.0) (100.0) (150.0) (200.0) (200.0) Proceeds (repayment) of debt (1,157.5) (1,247.0) (1,273.5) (1,273.5) (1,273.5) (15.8) (271.6) (1,091.3) (1,100.2) (1,100.2) (39.1) (58.5) (58.5) Other Cash from Financings (40.4) (179.2) (1,627.7) (1,742.8) (1,776.7) (1,784.5) (1,784.5) (17.0) (23.1) (1,027.0) (1,120.8) (1,120.8) (99.9) (184.9) (349.1) (470.3) (470.3) Net cash provided (used) by discontinued operations (0.2) 3.2 (0.3) Free cash flow (44.2) Free cash flow per share $ 0.92 $ 2.01 $ 1.27 $ (0.33) $ 0.24 $ 2.57 $ 4.50 $ 4.45 $ 0.57 $ 0.53 $ 3.28 $ 4.62 $ 4.58 $ 0.98 $ 1.65 $ 2.95 $ 3.92 $ 3.90 Source: Company Reports & KeyBanc Capital Markets Estimates Pg.7

8 Disclosure Appendix Darden Restaurants, Inc. - DRI We expect to receive or intend to seek compensation for investment banking services from Darden Restaurants, Inc. within the next three months. As of the date of this report, we make a market in Darden Restaurants, Inc.. Coverage was transitioned to current research analyst on 7/12/12. All prior rating and price target activity indicated on this chart reflects the work of a previous research analyst. Reg A/C Certification The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this research report. Three-Year Rating and Price Target History Rating Disclosures Distribution of Ratings/IB Services Firmwide and by Sector KeyBanc Capital Markets IB Serv/Past 12 Mos. Consumer IB Serv/Past 12 Mos. Rating Count Percent Count Percent Overweight [OW] Sector Weight [SW] Underweight [UW] Rating Count Percent Count Percent Overweight [OW] Sector Weight [SW] Underweight [UW] Pg.8

9 Disclosure Appendix (cont'd) Rating System Overweight - We expect the stock to outperform the analyst's coverage sector over the coming 6-12 months. Sector Weight - We expect the stock to perform in line with the analyst's coverage sector over the coming 6-12 months. Underweight - We expect the stock to underperform the analyst's coverage sector over the coming 6-12 months. Note: KeyBanc Capital Markets changed its rating system after market close on February 27, The previous ratings were Buy, Hold and Underweight. Additionally, Pacific Crest Securities changed its rating system to match KeyBanc Capital Markets rating system after market close on April 10, 2015, in conjunction with the merger of the broker dealers. The previous ratings were Outperform, Sector Perform and Underperform. Other Disclosures KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC ( KBCMI ), and KeyBank National Association ( KeyBank N.A. ), are marketed. Pacific Crest Securities is a division of KeyBanc Capital Markets Inc. KeyBanc Capital Markets Inc. ( KBCMI ) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This report has been prepared by KBCMI. The material contained herein is based on data from sources considered to be reliable; however, KBCMI does not guarantee or warrant the accuracy or completeness of the information. It is published for informational purposes only and should not be used as the primary basis of investment decisions. Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security. The opinions and estimates expressed reflect the current judgment of KBCMI and are subject to change without notice. This report may contain forward-looking statements, which involve risk and uncertainty. Actual results may differ significantly from the forward-looking statements. This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity. No portion of an analyst s compensation is based on a specific banking transaction; however, part of his/her compensation may be based upon overall firm revenue and profitability, of which investment banking is a component. Individuals associated with KBCMI (other than the research analyst(s) listed on page 1 of this research report) may have a position (long or short) in the securities covered in this research report and may make purchases and/or sales of those securities in the open market or otherwise without notice. As required by FINRA Rule 2241(C)(4)(A), financial interest, if any, by any research analysts listed on page 1 of this report will be disclosed in Important Disclosures, Company-specific regulatory disclosures located above in the Disclosure Appendix. KBCMI itself may have a position (long or short) in the securities covered in this research report and may make purchases and/or sales of those securities in the open market or otherwise without notice. As required by FINRA Rule 2241(C)(4)(F), if KBCMI, or its affiliates, beneficially own 1% or more of any class of common equity securities in the subject company(ies) in this research report, it will be disclosed in Important Disclosures, Company-specific regulatory disclosures located above in the Disclosures Appendix. This communication is intended solely for use by KBCMI clients. The recipient agrees not to forward or copy the information to any other person without the express written consent of KBCMI. Pg.9