strategic actions balance weak olive garden fundamentals

8/10/2019 Strategic Actions Balance Weak Olive Garden Fundamentals

http://slidepdf.com/reader/full/strategic-actions-balance-weak-olive-garden-fundamentals 1/55

Please refer to pages 53 to 55 for Important Disclosures, including the Analyst's Certification.

Darden Restaurants(DRI-NYSE)

Stock Rating: Market Perform

Industry Rating: Market Perform

October 9, 2014

Andrew Strelzik 212-885-40BMO Capital Markets Corp.

[email protected]

Strategic Actions Balance Weak Olive GardenFundamentals; Initiating With Market Perform

Investment Thesis

We are initiating coverage of Darden with a Market Perform rating and $52

price target. Although we recognize the possibility for strategic actions and

believe they will continue to support DRI’s stock, we expect the likely longtimeline for an Olive Garden turnaround to pressure FY2015 EPS toward the

low end of guidance and would not be surprised if DRI falls short of

expectations. In addition, we believe DRI’s long-term earnings potential will be

determined largely by its ability to drive a turnaround at Olive Garden. We

estimate that a 100 basis point (bps) improvement in Olive Garden comps will

contribute $0.10 to EPS. First, in the near term, Darden should benefit from

several non-operating actions that drive 32 percentage points (pp) of our

FY2015 earnings growth expectation. In addition, LongHorn and Specialty

Restaurant Group are bright spots and should continue to generate solid growth,

while DRI’s G&A ratio likely will fall to 9% by the end of FY2015. Second,

over the long term, we expect Darden to generate 10%-plus EPS growthreflecting solid LongHorn and Specialty fundamentals, the eventual decline in

beef prices, and share repurchases. We assume stabilizing Olive Garden comps

rather than growth because we believe there is a long road to achieving a

turnaround. That said, the Olive Garden turnaround becomes increasingly

important beyond FY2015 as one-time EPS benefits will not recur, margin

opportunities likely are more limited, and Darden likely will not further

deleverage.

Forecasts & Valuation

Our FY2015 and FY2016 EPS of $2.23 and $2.47 are $0.01-$0.02 below

consensus. Our price target reflects a blend of 1) $45 target based onfundamentals as we assign a 20x P/E to our FY2015 EPS and 2) $56-$57

target based on DRI’s possible break-up value. We assign a 40% probability

to DRI continuing to operate in its current structure. The 20x P/E implies a

40%-45% premium to DRI’s historical multiple (14x). DRI currently is

trading at a forward 12-month P/E of 22x.

Recommendation

We are initiating coverage of Darden with a Market Perform rating and $52

price target.

Price (8-Oct) $49.99 52-Week High $54.8Target Price $52.00 52-Week Low $43.5

20

30

40

50

60

1.5

2.0

2.5

3.0

3.5

4.0

Darden Restaurants, Inc. (DRI)

Price: High,Low,Close(US$) Earnings/Share(US$)

0

50

100

0

50

100Volume (mln)

2010 2011 2012 2013 201450

100

150

50

100

150DRI Relative to S&P 500

Last Data Point: October 8, 2014

(FY-May.) 2013A 2014A 2015E 2016E

EPS $1.90 $1.56 $2.23 $2.4P/E 22.4x 20.2

CFPS - $1.32 - $1.11 - $1.35 $0.1P/CFPS na nm

Rev. ($mm) $5,921 $6,286 $6,602 $6,68EV ($mm) $8,083 $8,083 $8,083 $8,08EBITDA ($mm) $695 $650 $745 $81EV/EBITDA 11.6x 12.4x 10.8x 9.9

Quarterly EPS Q1 Q2 Q3 Q

2013A $0.49 $0.10 $0.69 $0.62014A $0.32 $0.07 $0.68 $0.42015E $0.32a $0.27 $0.81 $0.8

Dividend $2.20 Yield 4.4%Book Value $16.08 Price/Book 3.1

Shares O/S (mm) 131.9 Mkt. Cap (mm) $6,59Float O/S (mm) 103.8 Float Cap (mm) $5,18Wkly Vol (000s) 7,938 Wkly $ Vol (mm) $393.Net Debt ($mm) na Next Rep. Date n

Notes: All values in US$First Call Mean Estimates: DARDEN RESTAURANTS INC (US$2015E: $2.24; 2016E: $2.48



BMO Capital Markets Darden Restauran

October 9, 2014

Investment Conclusion

We are initiating coverage of Darden with a Market Perform rating and a $52 price target, whi

implies 4% upside from current levels. On a fundamental basis, we see downside to Darden’s sto

as the likely long timeline required for a turnaround in Olive Garden trends likely will pressu

earnings toward the low end of Darden’s FY2015 guidance, and we would not be surprised if Dardwere to fall short of its expectations. That said, we recognize the possibility for strategic actions bas

on pressures from activist shareholders and believe the possibility of such actions will continue

support Darden’s stock above its underlying value based on the company's earnings outlook.

We expect Darden to generate 43% earnings growth in FY2015 largely reflecting non-operati

improvements; however, Olive Garden trends likely will remain lackluster for at least the ne

several quarters, creating create downside earnings risk. First, the combination of deleveragi

(16 pp), share repurchases (6 pp), and the absence of shared support costs (10 pp) drive 32 pp of o

FY2015 earnings growth expectation. Second, LongHorn Steakhouse and Specialty Restaurant Gro

are bright spots within Darden’s portfolio as the steak segment is the strongest in casual dining, wh

“polished casual” and fine dining outperforms casual dining trends. We believe LongHorn wcontinue to generate solid comparable-restaurant sales growth as retail beef prices should remain

record levels for the foreseeable future and there is a strong relationship between casual dining ste

traffic and retail beef prices. In addition, the Specialty Restaurant Group should continue to bene

from its concentration in fine dining and “polished casual” owing to the more favorable price-val

perception and more “occasion-based” dining (consumers are less likely to forego eating out for

occasion relative to casual dining occasions). Third, we expect Darden’s G&A ratio to fall to 9%

the end of FY2015 as we estimate a $50 million cost savings opportunity in FY2015 ($50 million r

rate by the end of the year). The cost savings likely will create a 100 bps margin tailwind as

estimate FY2015 G&A ratio of 9.2% relative to 10.3% in FY2014. That said, we believe the potent

Olive Garden turnaround is the key to driving upside to expectations and we believe 1) the turnarou

will take several quarters, and 2) the long timeline to achieving a turnaround creates downside riskearnings estimates.

Over the long, term we expect Darden to generate double-digit earnings growth assumin

stabilizing Olive Garden trends; however, we believe Olive Garden trends becom

increasingly important beyond FY2015. First, our longer term earnings growth expectati

reflects ongoing strong LongHorn and Specialty Restaurant Group fundamentals, marg

expansion opportunities with the eventual decline in beef prices, the full benefit of FY20

balance sheet deleveraging, and ongoing share repurchases. Second, we do not assume Oli

Garden returns to comparable-restaurant sales growth in our longer term earnings outlook becau

we believe Darden has a long road ahead to achieve a turnaround. That said, a turnaround wou

significantly improve Darden’s comparable-restaurant sales growth and earnings trajectory givits size in Darden’s portfolio (nearly 60% of sales). We estimate that a 100 bps improvement

Olive Garden’s annual comparable-restaurant sales trends would contribute 60 bps to its blend

same-store sales growth and approximately $0.10 to EPS. Third, the Olive Garden turnarou

becomes increasingly important beyond FY2015 as one-time benefits from FY2015 will not rec

(e.g., shared support cost shift), margin opportunities likely are more limited outside of the be

price decline, Darden likely will not further deleverage its balance sheet, share repurchases cou

slow with greater free cash flow deterioration if Olive Garden trends do not stabilize, and t

Olive Garden: Leading casualdining Italian concept with 25%share of Italian segment. Nearlyfully penetrated in U.S.

LongHorn Steakhouse: Casualdining steak concept. Regionalfootprint with opportunity toexpand nationally.

Bahama Breeze: Casual diningconcept focused on Caribbean-inspired dishes. Opportunitiesfor unit expansion.

Seasons 52: “Polished casual”concept with seasonally-inspired menus. Specializes in

lighter options as all menu itemsare 475 calories or lower.Opportunities for unitexpansion.

The Capital Grille: Fine-diningsteakhouse with select unitexpansion opportunities.

Eddie V’s: High-end seafoodconcept with unit expansion

potential.

YardHouse: Casual dining

concept with a focus onAmerican dishes and craft beers.Opportunities for unitexpansion.




October 9, 2014

absence of an Olive Garden turnaround could augment unit expansion plans beyond Oli

Garden.

The potential for strategic actions likely will continue to support Darden’s valuation abov

historical levels; however, Darden’s break-up value does not create enough upside

justify an Outperform rating, in our view. We assign a 40/60 probability to 1) Dard

continuing to operate in its current structure, and 2) strategic action to release value fro

Darden’s underlying assets. First, we derive a $45 price target on a fundamentals basis as w

assign a lofty 20x P/E to our $2.23 EPS estimate for FY2015. The 20x P/E implies a 40%-45

premium to DRI’s historical multiple reflecting the likelihood that FY2015 earnings are depress

by recent Olive Garden performance and the potential for materially stronger earnings

management’s turnaround initiatives take hold. Second, we derive a $56-$57 price target based

our analysis of Darden’s possible break-up value based on our FY2015 expectations. F

perspective, DRI currently is trading at a forward 12-month P/E and EV/EBITDA of 22x and 1

11x that is well above the stock's historical average valuation (14x P/E and 7.5x EV/EBITDA

While we cannot justify the current multiple on a fundamental basis, DRI likely will continue

trade well above its historical multiple unless it becomes clear that activist pressures will n

result in a material changes.

Risks to our investment thesis. In our view, the key risks to our price target include t

following: 1) aggressive strategic actions to release value, 2) a stronger/earlier turnaround

Olive Garden trends, 3) more aggressive share repurchases, 4) improving macroeconom

conditions (e.g., consumer confidence/spending), and 5) multiple expansion if results exce

expectations.




October 9, 2014

Key Investment Opportunities

Pockets of same-store sales strength and outperformance of industry trends beneath poor Oli

Garden results.

Unit expansion opportunities at select concepts support long-term growth outlook.

Cost savings, lower investments, cost shift to Red Lobster, and lower beef prices create marg

expansion opportunities.

Deleveraging, Red Lobster sale, capex pullback, and cash inflection support EPS and returni

cash to shareholders.

Opportunities to “release” value with strategy shift or portfolio optimization if Olive Gard

turnaround fails.

Pockets of Same-Store Sales Strength and Outperformance of IndustryTrends Beneath Poor Olive Garden Results

Darden’s comparable-restaurant sales show pockets of strength and outperformance

industry trends beneath the poor Olive Garden comps. Darden’s blended same-store sa

have declined an average of 40 bps and underperformed the casual dining industry by 20 bps ov

the last three years, according to Knapp Track data, as its comps declined 8 of the last 12 quarte

Darden’s poor same-store sales entirely reflect weak Olive Garden (nearly 60% of Darden’s sale

trends as Olive Garden’s same-store sales have declined an average of 2.1% and underperform

the casual dining industry by 190 bps over the last three years. That said, Darden’s LongHo

Steakhouse and Specialty Restaurant Group comparable-restaurant sales trends show pockets

strength beneath the poor Olive Garden results. Specifically, LongHorn and Specialty Restaura

Group generate comparable-restaurant sales growth that 1) is consistently positive, 2) outperfor

industry same-store sales, and 3) is in line with its casual dining peers in our coverage.

Exhibit 1. Darden Concepts Dollar Sales ($mm)

Olive Garden

$3.6

LongHorn

Steakhouse

$1.4

Bahama Breeze

$0.2

Capital Grille

$0.4

Yard House

$0.4

Seasons 52

$0.2 Eddie V's

$0.1

Source: Company Reports and BMO Capital Markets




October 9, 2014

Exhibit 2. Darden Comparable-Restaurant Sales Growth Relative Industry

‐0.5%

‐0.4%

‐0.3%

‐0.2%

‐0.1%

0.0%

T h r e e

‐ Y e a r A v e r a g e C o m p a r a b l e

R e s t a u r a n t S a l e s G r o w t h

Industry Darden

Source: Knapp Track, Company Reports and BMO Capital Markets

Exhibit 3. Darden Concept’s Comparable-Restaurant Sales ChangRelative to Industry

‐8.0%

‐4.0%

0.0%

4.0%

8.0%

C o m p a r a b l e R e s t a u r a

n t S a l e s

‐

Y ‐ o

‐ Y

C h a n g e

Industry Olive Garden

LongHorn Specialty Restaurant Group





October 9, 2014

Exhibit 4. Darden Concept’s Comparable-Restaurant Traffic ChangRelative to Industry

‐8.0%

‐4.0%

0.0%

4.0%

8.0%

C o m p a r a b l e R e s t a u r a n t T r a f f i c

‐

Y ‐ o

‐ Y

C h a n g e

Industry Olive Garden LongHorn


LongHorn Steakhouse (22% of Darden’s sales) generated average comparable-sales grow

of 3.0% over the last three years as the concept posted positive comparable-restaurant sal

growth in all but two quarters over that period. LongHorn’s same-store sales growth h

outpaced casual dining industry comps by 320 bps over the last three years driven by 400 b

of traffic outperformance, according to Knapp Track data. In fact, LongHorn’s comps are

line with Outback Steakhouse’s domestic comps over that period and trailed Tex

Roadhouse’s steak category-leading comps by only 100 bps.

Specialty Restaurant Group’s (20% of Darden’s sales) comparable-restaurant sales improv

an average of 2.6% over the last three years and outpaced casual dining industry same-stosales by 280 bps, according to Knapp Track data. The segments’ same-store sales increas

in all but one quarter over the last three years and the only decline occurred in the weath

impacted FY3Q14 (severe weather and a Thanksgiving timing shift created a 160 bps a

100 bps headwind to Darden’s overall comps, respectively). Darden’s Specialty Restaura

Group shows broad-based strength across its concepts over time owing to the following:

o Capital Grille (6% of sales) posted average same-store sales growth of 4.1% over the l

three years, and outperformed industry comps by 430 bps, while comps declined on

once over that period.

o Bahama Breeze (3% of Darden’s sales) generated 2.3% average same-store sales grow

over the last three years, and outpaced industry comparable-restaurant sales by 250 bpBahama Breeze’s comparable-restaurant sales declined in only two quarters during th

period.

o Eddie V’s (1% of sales) generated 2.0% average same-store sales growth a

outperformed industry comps by 340 bps over the last six quarters (acquired

November 2011). Comps declined only once over that period.




October 9, 2014

o Seasons 52 (3% of sales) posted 0.5% average comparable-restaurant sales growth ov

the last three years and outperformed industry comps by 70 bps. Same-store sal

declined only four times over the last three years, although the declines all occurred

the last two years.

o Yard House (6% of sales) comps increased an average of 0.1% over the last four quart

(acquired in August 2012) and outperformed the casual dining industry by 190 bps ov

that period. Although Yard House comps declined in two of the last four quarters, t

FY3Q14 decline of 10 bps entirely reflected weather and the Thanksgiving shift.

Exhibit 5. Specialty Restaurant Group Comparable-Restaurant SaleChange Relative to Industry

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

T h r e e

‐ Y e a r A v e r a g e C o m p a r a b l e

R e s t a u r a n t S a l e s G r o w t h

Industry Bahama Breeze Capital Grille Seasons 52 Eddie V's


Note: Eddie V’s reflects only two years of data

Strong casual dining steak segment trends supported LongHorn same-store sales grow

and should contribute to ongoing momentum. The steak category remains one of the mo

resilient in casual dining. Casual steak category traffic outperformed casual dining industry traf

in all but 6 of the last 28 months, according to NPD Group data, as traffic increased an average

40 bps over that period relative to a 170 bps decline in casual dining segment traffic. In additio

casual steak category traffic growth outpaced the year-over-year change in bar/grill, Mexica

Italian, and seafood segment traffic by 130, 250, 380, and 430 bps, respectively, over the sam

period. Notably, LongHorn should continue to benefit from strong steak segment trends givnational advertising to maintain top-of-mind brand awareness within the segment (FY2014 w

the first year in which LongHorn had sufficient scale for national advertising over an entire ye

and an average check that is largely in line with the segment and Outback Steakhouse (i.e., $

vs. $18 segment average and $20 at Outback).




October 9, 2014

Exhibit 6. Average Monthly Casual Dining Sales Growth by Food Type –2012 to Current

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Italian Mexican Seafood Steak Bar & Grill

S a l e s G r o w t h

Source: NPD Group and BMO Capital Markets.

Exhibit 7. Average Monthly Casual Dining Traffic Growth by Food Type – 2012 to Current

‐5.0%

‐4.0%

‐3.0%

‐2.0%

‐1.0%

0.0%

1.0%

Italian Mexican Seafood Steak Bar & Grill

T r a f f i c G r o w

t h


We believe historically high retail (i.e., grocery store) beef prices – in response to reco

wholesale beef prices – is a key contributor to casual steak segment traffic outperformance

casual dining industry levels. First, retail beef prices increased more than 40% over the la

four to five years as record-tight cattle supplies drove a 60%-plus increase in wholesale be

costs over the same period. In fact, three-month rolling average retail and wholesale be

prices show a 97% correlation since the beginning of 1970 and the correlation remains int




October 9, 2014

as both wholesale and retail beef prices rallied to record levels most recently (as shown

Exhibit 8). Second, the change in retail beef prices from year-ago levels shows a stro

relationship with the change in casual dining steak segment traffic, per NPD Group da

since 2012 (as shown in Exhibit 9). Although the 56% correlation is somewhat modest

there are other factors that also impact traffic, such as promotions and other competiti

activity – changes in retail beef prices and casual steak segment traffic nonetheless show

solid directional relationship.

Exhibit 8. Retail and Wholesale Beef Prices

200

220

240260

280

300

320

340

360

380

375

425

475

525

575

625 W h o l e s a l eB e e f P r i c e s ( c e n t s / l b )

R e t a i l B e

e f P r i c e s ( c e n t s / l b )

Retail Wholesale

Source: USDA and BMO Capital Markets.

Exhibit 9. Retail Beef Prices Support Casual Dining Steak Traffic

‐10%‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

10%

‐1.0%

‐0.5%

0.0%

0.5%

1.0%

1.5% C a s u a l S t e a k T r a f f i c ‐

Y ‐ o‐ Y C h a n g e‐

T h r e e M o n t h A v e r a g

e

R e t a i l B e e f P r i c e

‐

Y ‐ o

‐ Y C h n a g e

‐

T h r e e

M o n t h A v

e r a g e L a g g e d T h r e e M o n t h s

Retail Beef Price Casual Steak Traffic

Source: NPD Group, USDA, and BMO Capital Markets.




October 9, 2014

Casual steak segment traffic likely will remain supported over the next several years

increasing wholesale and retail beef prices. First, beef prices likely will remain elevated un

2016 as the 2012 and 2013 U.S. calf crops (two-year leading indicator of slaughter-rea

cattle supply) imply a 1%-3% decline in cattle supplies in 2014 and 2015. Second, althou

we expect wholesale beef prices to begin sliding in 2016, retail beef prices may not decli

with the initial fall in wholesale prices as 1) retail beef gross margins contracted over the lfour to five years as the increase in wholesale beef prices outpaced the increase in retail be

prices by 2,100 bps; 2) retailers may maintain high beef prices amid sliding wholesale pric

to recapture the lost margin, particularly in light of ongoing overall grocery margin pressur

and 3) the 3%-4% increase in retail beef sales from year-ago levels over the last 12 mont

(despite significant inflation) likely will not incentivize lower beef prices when wholesa

prices begin to slide.

Exposure to the “polished casual” and fine-dining segments coupled with Baham

Breeze’s superior concept differentiation should continue to support Specialty Restaura

Group’s comparable-restaurant sales growth momentum. We expect Darden’s Specia

Restaurant Group to maintain its comparable-restaurant sales growth momentum as 1) 50%-55

of its sales are from higher-end (e.g., fine dining, polished casual) chains – a segment of t

industry that shows greater resilience than the casual dining industry; and 2) Bahama Bree

(15%-20% of Specialty Group sales, true casual dining) benefits from material bra

differentiation. First, Capital Grille, Eddie V’s, and Seasons 52 compete in the fi

dining/polished casual segments of the restaurant industry ($40-$90 average check) th

outperformed the traditional casual dining segment over the last several years, in part as

customer base is more affluent and better positioned in terms of disposable income in the curre

tepid economic/consumer environment. Specifically, average fine dining sales and traffic grow

(three-month rolling average) over the last two or more years of 5%-6% and 2%-3%, respective

outpaced casual dining sales and traffic growth by 400-500 bps and did not underperform casu

dining in any month over that period. Second, although Bahama Breeze competes in t

traditional casual dining segment, we believe its superior brand differentiation as a Caribbea

themed concept should continue to support its growth trajectory owing to a more limit

competitive threat.




October 9, 2014

Exhibit 10. Casual and Fine Dining Sales – Year-Over-Year Change

‐2%

0%

2%

4%

6%

8%

10%

Y ‐ o

‐ Y C h a n g e i n D o l l a r s

‐ 3

M o n t h R o l l i n g

A v e r a g e

Fine Dining Casual Dining


Exhibit 11. Casual and Fine Dining Traffic – Year-Over-Year Change

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

Y ‐ o

‐ Y C h a n g e i n T r a f f i c

‐

3 M o n t h R o l l i n g

A v e r a g e

Fine Dining Casual Dining


An inflection in Olive Garden's comparable-restaurant sales trends would meaningfuchange Darden’s comp and earnings growth trajectory. We believe Darden has a long ro

ahead of it to achieve a turnaround at Olive Garden reflecting material brand degradation in t

eyes of consumers, in our view, and the time required for consumers to both recognize changes

the concept and change their visit frequency behavior. That said, Darden is in the process

implementing strategic initiatives to improve the concept's long-term positioning. The potent

for a turnaround in Olive Garden trends would significantly improve Darden’s comparab

restaurant sales growth and earnings trajectory given its size in Darden’s portfolio (nearly 60%




October 9, 2014

sales). For instance, we estimate that a 100 bps improvement in Olive Garden’s annu

comparable sales trends contributes 60 bps to its blended same-store sales growth and $0.10

EPS. Darden’s initiatives to improve Olive Garden’s trends include 1) a new logo (introduced

FY2014) and restaurant design (75 units to be remodeled in FY2015, three years to remodel t

350 units identified for remodels, remodel candidates have comps 200 bps below other units a

generate mid-single-digit comp improvement with remodel); 2) an updated menu that launched

late February with lighter and lower priced options (Cucina Mia selection with $9.99 price poin3) reinvesting cost savings in higher quality ingredients (e.g., higher quality proteins); 4) Pron

lunch menu that facilitates faster lunch visits (less than 45 minutes); 5) greater leadership focus

underperforming restaurants; 6) tablet introduction in FY2015 to improve guest experience; a

7) a shift in its advertising strategy toward a balance between a brand building and pri

promotion message from a heavily price related message.

Unit Expansion Opportunities at Select Concepts Support Long-TermGrowth Outlook

LongHorn’s transition to a national chain from its current regional footprint coupled wi

greater penetration of Specialty Restaurant concepts across the U.S. should create lon

term growth opportunities. We believe Darden’s mid- to high-single-digit long-term reven

growth expectation (implies low- to mid-single-digit annual unit growth as Darden assum

1%-2% same-store sales growth) is achievable assuming an eventual turnaround in Olive Gard

reflecting unit expansion opportunities across select concepts. New store openings not on

provide a consistent base for Darden’s sales growth algorithm, but also create a highly visib

sales growth profile that is within the company’s control. For instance, Darden had generated 8

average sales growth over the last four years that exceeds mature casual dining peers (3% f

Bloomin’ Brands and less than 1% growth for Brinker), but trails less mature peers, such

Chuy’s (+31%), Buffalo Wild Wings (+24%), and Texas Roadhouse (+11%).

Exhibit 12. Darden Sales Growth Relative to Peers

0%

5%

10%

15%

20%

25%

30%

35%

CHUY BWLD TXRH DRI BLMN EAT


‐

F o u r Y e a r A v e r a g e

Source: Company Reports and BMO Capital Markets.




October 9, 2014

Darden’s unit expansion opportunities largely are concentrated in LongHorn and Special

Restaurant Group concepts as 1) Darden seeks to expand LongHorn to a national chain fro

its current Eastern U.S. regional footprint; 2) Specialty Restaurant Group concepts ha

material runway to reach penetration; and 3) Olive Garden has only modest unit expansi

opportunities as it is the largest casual dining Italian concept (25% share of segment) with

national footprint.

Darden will slow development across its concepts from recent levels over the next three yea

to focus on its operations (Olive Garden unit expansion suspended for at least three years, 1

20 new LongHorn units annually relative to 30-35 previously, 20-25 Specialty Restaura

Group units annually relative to 25-30 previously). However, Darden expects to achie

2,100-2,450 units over the long term, including 1) 950 Olive Garden units (837 currently),

600-800 LongHorn units relative to its current base of 464 units (success in California a

Texas is key to achieving high-end of range), 3) 75 Capital Grille and Eddie V’s units ea

(54 and 15 units, respectively, at the end of FY2014), 4) 150-200 Yard House units (5

currently), 5) 100-150 Bahama Breeze units (37 currently), and 6) 150-200 Seasons 52 un

(38 currently).

Exhibit 13. Unit Expansion Opportunity by Concept

0%

75%

150%

225%

300%

375%

450%

U p s i d e t o U n i t T a r g e t s





October 9, 2014

Exhibit 14. Slowing Unit Growth

0%

2%

4%

6%

8%

10%

12%

2010 2011 2012 2013 2014 2015E 2016E

U n i t G r o w t h


International expansion represents an opportunity, but the preference for franchise/licen

agreements limits the impact for shareholders and likely is not a material focus given k

issues in the U.S. In line with other casual dining concepts, Darden has long-term internation

unit expansion opportunities. In fact, Darden has 55 international units currently a

commitments for 250 international units over the next three to four years. Darden’s internation

expansion currently focuses on the Middle East, Brazil, other South and Central Americ

countries, and Malaysia. That said, the impact of Darden’s international expansion appea

limited as Darden prefers franchise/license agreements for international expansion rather th

joint ventures or company-owned units to limit risk. In addition, we do not expect a shift

Darden’s international strategy to capture greater international returns in light of the significa

management focus on operations in the U.S., particularly Olive Garden.

Cost Savings, Lower Investments, Cost Shift to Red Lobster, and LoweBeef Prices Should Create Margin Expansion Opportunities

Darden’s margin structure fell over the last several years and trails that of its casual dinin

peers despite recent cost saving efforts. Darden’s operating and EBITDA margins (excluding R

Lobster) of 5%-6% and 10%-11% in FY2014 both fell 140-155 bps and 280-320 bps over the last o

and two years, respectively, reflecting food cost inflation, rising other restaurant operating cos

comparable-restaurant sales declines, and an estimated $25 million (40 bps margin headwind)

shared support costs that move to Red Lobster in FY1Q15 (Darden disclosed only that the c

headwind was $0.15 to EPS in FY2014, following the sale of Red Lobster to Golden Gate Capital

July 2014). Darden’s margin structure fell below its casual dining peer group’s operating aEBITDA margins that are in the 7%-8% and 12%-13% range, respectively, and are the lowest in o

casual dining coverage. Darden realized margin degradation despite a renewed focus on cost savin

in FY2014 as Darden began implementing initiatives to generate cost savings at both the company a

restaurant level. First, Darden identified $60 million of SG&A savings and realized $25 million of t

savings in FY2014 owing to three rounds of headcount reduction, lower/more efficient marketi

spending, and lower other corporate fees. Second, Darden realized $30 million of restaurant-level c




October 9, 2014

savings at Olive Garden owing to labor efficiencies from reduced food preparation complexity ($

million) and food cost/waste savings. A portion of the restaurant-level savings was reinvested in low

price points and higher quality proteins; however, the company-level savings were not reinvested.

Exhibit 15. Margins Relative to Peers – Three-Year Average

BLMN BWLD CHUY DRI EAT TXRH

Casual

Dining Average

COGS 32.4% 30.2% 27.3% 29.6% 27.4% 34.1% 30.2%

Labor 28.3% 30.2% 32.1% 31.9% 32.3% 29.4% 30.7%

Rent 5.5% 5.8% 5.9% 3.0% 5.5% 2.1% 4.6%

Other 17.9% 14.9% 14.4% 13.6% 18.3% 16.3% 15.9%

Restaurant margin 15.8% 18.9% 20.2% 22.0% 16.5% 18.1% 18.6%

D&A 4.0% 6.5% 3.8% 4.7% 4.6% 3.7% 4.6%

G&A 6.8% 8.3% 5.5% 10.2% 4.8% 5.3% 6.8%

Operating profit 5.8% 8.4% 8.0% 7.1% 9.5% 8.7% 7.9%

EBITDA 9.8% 14.9% 11.8% 11.7% 14.0% 12.4% 12.5%


Exhibit 16. Margins Relative to Peers – Most Recent Fiscal Year

BLMN BWLD CHUY DRI EAT TXRH

Casual

Dining

Average

COGS 32.6% 30.7% 27.4% 30.1% 26.9% 34.9% 30.4%

Labor 27.9% 30.4% 32.6% 32.1% 32.1% 29.2% 30.7%

Rent 5.5% 5.8% 6.0% 3.0% 5.5% 2.1% 4.6%

Other 18.1% 14.7% 14.3% 14.2% 18.7% 15.9% 16.0%

Restaurant margin 15.9% 18.4% 19.7% 20.6% 16.9% 17.9% 18.3%

D&A 4.0% 6.7% 4.3% 4.8% 4.7% 3.6% 4.7%

G&A 6.4% 7.6% 4.9% 10.3% 4.5% 5.4% 6.5%

Operating profit 6.4% 8.0% 8.0% 5.5% 10.0% 8.3% 7.7%

EBITDA 10.4% 14.7% 12.3% 10.3% 14.7% 11.9% 12.4%


Exhibit 17. Darden’s Margin Structure Weakened

4%

5%

6%

7%

8%

9%

17%

19%

21%

23%

25%

2010 2011 2012 2013 2014

O p e r a t i n g P r o f i t M a r g i n

R e s t a u r a n t ‐ L e v e l M a r g i n

Restaurant Margin Operating Margin





October 9, 2014

Darden’s operating margins should improve in 2015, albeit followed by slower marg

expansion in 2016 as several items are only incremental to FY2015. We expect Darden

operating margins to improve by more than 100 bps in FY2015 and almost fully recapture t

margin degradation realized in FY2014. The ability to achieve our FY2015 margin expansi

expectations is highly visible, in our view, as cost savings are already achieved/identified, t

transition of shared services costs to Red Lobster is not in question, and the marketi

investments for LongHorn and the Specialty Restaurant Group are complete (although it arguably the most important for DRI’s stock, we believe only the comparable-restaurant sal

trend is in question; we estimate a 100 bps improvement in comparable-restaurant sales trends h

a 30 bps impact on margins). That said, Darden’s margin improvement likely will become mo

modest in FY2016, with the decline in beef prices likely the largest contributor.

Our expectation for more than 100 bps operating margin expansion in FY2015 reflects 1) 5

bps contribution to margins from the incremental $50 million of company-level cost savin

from its $60 million in identified savings (assumes $10 million of costs to achieve saving

2) 15-30 bps as the shared services costs were allocated to Red Lobster when the sale clos

(end of July), 3) 15-20 bps contribution from the absence of marketing investment costs

LongHorn and Specialty Restaurant Group in FY2014, and 4) approximately 20 bps

margin expansion from a modest comparable-restaurant sales growth improvement (w

estimate a 100 bps improvement in comparable-restaurant sales trends creates 30 bps

margin expansion). The most significant margin expansion likely will be realized in G&A

we expect G&A to fall to 9% by the end of FY2015.




October 9, 2014

Exhibit 18. G&A Opportunity

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

2011 2012 2013 2014 2015E

G & A a s a P e r c e n t o f S a l e s


That said, we expect a more modest 50+ bps operating margin improvement in FY2016 a

further margin expansion likely must be driven by accelerated same-store sales growth

1) opportunities for company-level cost savings likely are more muted; 2) addition

restaurant-level savings across concepts likely can be achieved, we expect a majority of t

savings to be reinvested, similar to the initial Olive Garden savings; and 3) Darden will l

the shift in shared services costs and absence of marketing investments.

Darden’s food cost inflation should remain somewhat manageable over the next 18 months

1) Darden is more than 50% covered for its food costs in FY1H15 at a low- to mid-sing

digit inflation level; and 2) the potential for 10%-plus lower dairy/oil (12% of input baske

chicken (8% of inputs), and seafood (12% of inputs) prices in FY2H15 and FY2016 shoumitigate the impact of likely higher beef costs (20% of input basket).

o Beef prices (20% of commodity basket) likely will continue to exceed year-ago leve

over the next 18 months as cattle supplies tighten further from the lowest levels since t

1950s. Specifically, 1) the CY12 and CY13 U.S. calf crops (a two-year leading indica

of slaughter-ready cattle supplies) fell 1%-3% below year-ago levels to the lowest lev

in 60 years, and 2) heifer retention to rebuild cattle supplies further removes cattle fro

the slaughter supply.

o Dairy prices (12% of commodity basket) likely will decline low- to mid-teens in 20

reflecting 1) pressure on U.S. prices from the 40% decline in global dairy prices (U.

prices have yet to fall due to high butter prices), 2) more normal China demand, 3) a 2% plus increase in U.S. production, and 4) the absence of EU production limits for the fi

time in recent history.




October 9, 2014

Exhibit 19. Dairy Prices

10

12

14

16

18

20

22

24

26

28

W h o l e s a l e A l l M i l k P r o d u c e r P r i c e

( $ / c w t )

Source: Informa Economics and BMO Capital Markets.

o Shrimp prices (seafood accounts for 12% of input basket) likely will fall 15%-plus

2015 to more normal historical levels as early mortality syndrome (EMS) subsides a

shrimp production in major producing/exporting countries (e.g., Thailand) recovers fro

disease-impacted levels. Shrimp prices already began to ease – falling nearly 10% fro

last year most recently – with moderating disease issues. Specifically, Thailand shrim

mortality rates began to decline in the recently started 2014 shrimp harvest, and there

optimism that production will increase in China, India, and Vietnam with the rece

discovery of the cause of EMS.

Exhibit 20. Shrimp Prices

Source: Urner Barry and BMO Capital Markets.




October 9, 2014

o Chicken prices (8% of commodity basket) likely will fall 10% in 2015 as chick

producers accelerate supply expansion to 3%. Record chicken margins supported

multi-year-low corn prices (low-$3 level relative to the $5-$7-plus range from 2011

2013) provide confidence that chicken producers will accelerate production growth wh

pullet supplies become available. Chicken producers’ eagerness to increase producti

already is evident in recent egg set growth (8-10 week leading indicator of producti

growth). Chicken industry sources indicate production growth should begin to accelera by July reflecting greater pullet availability in late fall/early winter (nine-month leadi

production indicator).

Exhibit 21. Chicken Cutout Values

80

90

100

110

120

130

140

150

160

C h i c k e n C u t o u t

V a l u e ( c e n t s / l b )

Source: Bloomberg and BMO Capital Markets.

Exhibit 22. Chicken Cutout Margin

50

60

70

80

90

100

110

120

C h i c k e n

I n d u s

t r y C u

t o u

t M a r g

i n

( c e n

t s p e r

l b ) Average

Onest. dev





October 9, 2014

Exhibit 23. Relationship Between Chicken Margins and Production

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

10%

12%

55

65

75

85

95

105

115 C h i c k e n P r o d u c t i o n‐

T h r e e M o n t h R o l l i n g A v e r a g e

Y ‐ o‐ Y C h a n g e

C h i c k e n C u t o u t M a r g i n ( c e n t s / l b )

‐ ‐

T h r e e M o n t h

R o l l i n g A v e r a g e ( L a g g e d

S e v e n M o n t h s )

Chicken Margin Chicken Production

Disconnect due to

supply limitations


Exhibit 24. Egg Sets and Chicks Placed

-9.0%

-7.5%

-6.0%

-4.5%

-3.0%

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%

Y e

a r - O v e r - Y e a r

% C h a n g e

( R

o l l i n g

6 W e e

k A v e r a g e

)

Egg Sets Chicks Placed


Although lower price point menu items likely create a modest headwind to comparabl

restaurant sales growth, the menu items likely are margin-enhancing. For instance, westimate the food cost ratio on Olive Garden’s Cucina Mia menu items to be 28% relative

Darden’s 30%-plus consolidated food cost ratio.

Although margin opportunities likely are more modest beyond FY2015, the eventu

decline in beef prices creates incremental margin improvement opportunities. Beef pric

likely will continue to increase in 2015 as supplies tighten further; however, we expect beef pric

to peak in 2015 and begin to slide in 2016. We estimate that a 10% decline in beef prices cou




October 9, 2014

contribute $40 million of profits, 60 bps to margins, and $0.20-$0.25 to EPS assuming the savin

are not reinvested. First, beef prices likely will increase in 2015 as 1) 2014 cattle supplies like

will decline 1.5%-2.0% to the smallest supply since the early 1950s; 2) 2015 cattle supplies like

will tighten further as the 2013 U.S. calf crop, which is a 14-month leading indicator of slaugh

ready cattle supplies, declined 1% to the lowest level since the early 1950s; and 3) beef pric

likely must increase before falling as heifer retention to rebuild cattle supplies removes cat

from the slaughter supply. Heifer retention began to gain momentum in 2014 as the percentageheifers in the weekly cattle slaughter mix fell an average of 1%-2% below year-ago levels to d

in 2014 relative to flat with year-ago levels in 2013 (fewer heifers in the slaughter mix impl

heifers are retained for breeding). Second, the onset of heifer retention implies initial cattle/b

supply growth in 2016 owing to the timing of the lifecycle (two years), which should begin

pressure beef prices. Moreover, the likely competing protein supply growth (i.e., chicken a

pork) should contribute to lower beef prices.

Exhibit 25. Beef Prices

140

150

160

170

180

190

200

210 220

230

240

C h o i c e B e e f C u t o u t V a l u e ( c e n

t s / l b )


Exhibit 26. 2014 Beef Inflation

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

B e e f I n f l a t i o n

Source: Company Reports, Bloomberg, and BMO Capital Markets




October 9, 2014

Exhibit 27. U.S. Cattle Supplies

120,000

125,000

130,000

135,000

140,000

145,000

150,000

155,000

160,000

165,000

U S C a t t l e S u p p l y ( 0 0 0 H e a d )


Exhibit 28. Heifer Retention

30%

32%

34%

36%

38%

40%

H e i f e r S l a u

g h t e r a s % o f S t e e r a n d H e i f e r

S l a u g h t e r

2013 2014


Deleveraging, Red Lobster Sale, Capex Pullback, and Cash InflectionSupport EPS and Returning Cash to Shareholders

Darden generated solid cash flow over the last several years despite operational weaknes

which allowed for consistent dividend growth and share repurchases (absent periods aft

acquisitions). Darden generated $500-$600 million of cash flow from operations (excluding R

Lobster) over each of the last three years despite declining comparable-restaurant sales a

earnings. Darden’s consistent cash flow generation created the ability to consistently increase

dividend and repurchase stock in periods not following an acquisition. First, Darden increased

dividend in each of the last four years, with average dividend growth of 22%. Darden’s divide

produced an industry-leading dividend yield of nearly 5% relative to industry average levels (f




October 9, 2014

those that pay a dividend) of less than 3%. To be fair, Darden’s dividend growth slowed over t

last two years to the 10%-16% level as slower earnings growth pushed Darden’s payout ra

above its target level in the 50%-60% range (payout ratio of 63% and 101% in FY2013 an

FY2014, respectively). Second, Darden has consistently repurchased its stock over time, despite

pullback in FY2014 after acquiring YardHouse in the previous year for nearly $600 million. F

instance, Darden repurchased $50-$100 million of stock in FY2010 and FY2013 and increased

buyback program to nearly $400 million in both FY2011 and FY2012.

Exhibit 29. Consistent Dividend Growth

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

2010 2011 2012 2013 2014

D i v i d e n d P e r S h a r e


Exhibit 30. Darden Share Repurchases

$0

$50

$100

$150

$200

$250

$300

$350

$400$450

2010 2011 2012 2013 2014

S h a r e R e p u r c h a s e s ( $ m m )





October 9, 2014

The Red Lobster sale, a pullback in capex, and a potential cash flow inflection could crea

opportunities to support EPS growth and shareholder returns. We estimate that t

allocation of Red Lobster sale proceeds should contribute 1) $0.25 and $0.07 to EPS in FY20

and FY2016, respectively, from balance sheet deleveraging; and 2) $0.10-$0.15 and $0.03-plus

FY2015 and FY2016 EPS from the accelerated share repurchase program (timing of debt p

down and share repurchases imply incremental benefit to FY2016). In addition, the ability

repurchase shares on an ongoing basis could contribute an additional $0.03-$0.05 annually EPS.

Darden announced its intention to allocate the proceeds ($1.6 billion) from the Red Lobst

sale and the cash savings from a nearly $100 million reduction in capex spending (related

slower unit growth) toward 1) a $500-$600 million accelerated share repurchase progra

(completed by October) that is incremental to the company's original intention to repurcha

up to $200 million of stock in FY2015, and 2) paying down $1 billion of debt (completed

August). The debt pay-down should reduce Darden’s leverage ratio (excluding Red Lobste

to 2.2x from 4.2x (the highest in our coverage).

An inflection in cash flow generation (assuming Olive Garden fundamentals do not deteriora

further) likely would create greater capital allocation focus on share repurchases over the neseveral years as 1) Darden plans to maintain its current dividend until earnings growth aligns

payout ratio with its 50%-60% target range, 2) Darden’s earnings may not grow into its payo

ratio for three to five years, and 3) Darden likely will not further deleverage its balance sheet. W

estimate Darden could begin repurchasing 1.5-2.0 million shares of stock on an ongoing annu

basis beginning in FY2016 assuming stabilizing Olive Garden trends reflecting 1) an accelerati

of Darden’s cash flow from operations from the recent $500-$600 million range to nearly $7

million in FY2016 as earnings improve, 2) a reduction of capex spending to $335 million fro

$415 million last year, and 3) stable dividend. That said, there is a risk that share repurchas

could slow if Olive Garden trends deteriorate further.

Exhibit 31. Cash Flow Potential

$300

$400

$500

$600

$700

$800

2013 2014 2015E 2016E 2017E

C a s

h F l o w f r o m

O p e r a

t i o n s

( $ m m

)





October 9, 2014

Opportunities to “Release” Value With Strategy Shift or PortfolioOptimization if Olive Garden Turnaround Fails

Darden may begin to “release” value through a shift in its strategy or portfolio optimizatio

if the Olive Garden revitalization fails to take hold. In light of the CEO and potential boa

member changes coupled with the likely long timeline for a turnaround at Olive Garden, w

believe the opportunity exists for Darden to embark on a new strategic direction.

We would not be surprised if Darden begins to augment its strategy over the next 6-

months as 1) its new CEO, once appointed, may seek to establish a new path; and 2) Dard

shareholders may elect activist investor Starboard’s nominees to Darden’s board of directo

in the October 10th vote, similar to recent actions at Bob Evans. Components of Darden

strategy that could be augmented include, but are not limited to, 1) initiatives to impro

Olive Garden trends; 2) marketing spending across its portfolio; 3) unit growth trajecto

particularly for LongHorn and Specialty Restaurant Group; and 4) capital allocation. F

instance, Bob Evans' shareholders elected four of the eight nominees proposed by Sand

Asset Management to Bob Evans’ board in late August in an effort to bring about a change

strategy.

We assign a 60% probability to Darden embarking on portfolio optimization strategies ov

the next 12 months as the company implements initiatives to improve Olive Garden trend

That said, enduring poor Olive Garden trends could eventually lead to portfolio optimizati

strategies. We believe a break-up is the most likely method of portfolio optimization a

derive a break-up value of $56-$57/share based on our FY2015 estimates (15%-20% upsi

from current levels). Our break-up value assumes the following:

o $705 million of EBITDA, reflecting our continuing operations estimate of $745 milli

and $40 million of dis-synergies. Our dis-synergy assumption reflects $20 million ea

for LongHorn and Specialty Restaurant Group based on the $15 million of stranded co

with the Red Lobster sale and the likely need for additional support infrastructur

management investment, while we assume no dis-synergies for Olive Garden (curresupport infrastructure stays with Olive Garden). Note that every $10 million of d

synergies reduces our break-up value by nearly 2%.

o $8.2-$8.3 billion enterprise value, which implies an 11.5x-12.0x EV/EBITDA multip

based on comparable trading multiples and a 25% acquisition premium. We assign

elevated 25% acquisition premium owing to the company's ability to reaccelerate grow

at LongHorn and Specialty Restaurant Group coupled with depressed earnings from hi

beef costs.

o Full benefit of $1 billion debt pay-down and accelerated share repurchase from the R

Lobster sale to Golden Gate Capital in July 2014.




October 9, 2014

Exhibit 32. Darden Break-Up Value

Olive

Garden

LongHorn

Steakhouse

Specialty

Restaurant

Group Total

Sales 3,732 1,484 1,386 6,602

% allocation 57% 22% 21% 100%

Restaurant-level profits incl. D&A 594 223 214 1,030

Restaurant margin 15.9% 15.0% 15.4% 15.6%

Selling, general, and administrative 344 137 128 609

% allocation 57% 22% 21% 100%

Operating income 250 86 86 422

Operating margin 6.7% 5.8% 6.2% 6.4%

Depreciation and amortization 183 66 74 323

% allocation 57% 20% 23% 100%

EBITDA 432 152 160 745

EBITDA margin 11.6% 10.3% 11.5% 11.3%

Dis-synergies 0 20 20 40

Adjusted EBITDA 432 132 140 705

Comps

Average 8.2 8.7 11.8

Acquisition premium 30% 30% 30%

Adjusted average 10.7 11.3 15.3 11.7

Segment EV or sale price 4,628 1,500 2,141 8,270

Net Debt 1,170

Implied Equity Value 7,100

Current DRI 6,264

Shares 125

Implied Stock Price 56.66

FY15





October 9, 2014

Key Investment Concerns

Olive Garden performance and risk to turnaround at the concept could continue to weight

earnings and stock.

Headwinds to growth from weak casual dining and macro trends, segment dynamics, and casu

dining unit oversupply.

Potential for above-average volatility owing to diverse portfolio, operational changes, a

Specialty unit growth.

Greater commodity risk given high beef exposure and flexible purchasing strategy.

Structural increases in labor costs could create margin headwinds.

Olive Garden Performance and Risk to Turnaround at the ConceptCould Continue to Weigh on Earnings and the Stock

Deteriorating Olive Garden trends have weighed on Darden’s overall performance over t

last several years. After a post-recession recovery in FY2011 (+1.2%), Olive Gardencomparable-restaurant sales trends deteriorated and have declined over the last three years, a

the decline in same-store sales has accelerated over that period. The poor Olive Garden tren

pressured Darden’s blended comparable-restaurant sales to modest growth in FY2012 a

declines in both FY2013 and FY2014 as both LongHorn and Specialty Restaurant Gro

comparable-restaurant sales increased on an annual basis in each of the last three years. Fir

Olive Garden’s same-store sales declined an average of 2.1% over the last 12 quarters a

underperformed casual dining industry comps by 190 bps over that period, according to Kna

track data. Weak Olive Garden trends largely reflect declining traffic as Olive Garden has realiz

lower traffic in 10 of the last 12 quarters, including a 270 bps average traffic decline over th

period. Second, Olive Garden’s comparable-restaurant sales declines accelerated from a 1.2

decline in FY2012 to 1.5% in FY2013 and 3.4% in FY2014, while Olive Garden comparabrestaurant sales declined 3.5%-5.5% in each of the last two quarters. Accelerating traffic declin

drove the increasingly poor comparable-restaurant sales as Olive Garden traffic declined 1.4%

2.7%, and 4.0% in FY2012, FY2013, and FY2014, respectively (5.6% average decline over t

last two quarters). Third, Olive Garden’s poor same-store sales were somewhat isolated within t

casual dining Italian segment as its comps trailed casual Italian segment peer Carrabba’s by 3

bps over the last 12 quarters and Carrabba’s outperformed casual dining industry same-store sa

by 140 bps over that period.




October 9, 2014

Exhibit 33. Olive Garden and Industry Comparable-Restaurant Sales Year-Over-Year Change

‐4.0%

‐3.0%

‐2.0%

‐1.0%

0.0%

1.0%

2.0%

2012 2013 2014

C o m p a r a b l e R e s t a u r a n t S a l e s

‐

Y ‐ o

‐ Y

C h a n g e


Source: Knapp Track, Company Reports, and BMO Capital Markets

Exhibit 34. Olive Garden and Industry Comparable-Restaurant Traffic Year-Over-Year Change

‐4.5%

‐4.0%

‐3.5%

‐3.0%

‐2.5%

‐2.0%

‐1.5%

‐1.0%

‐0.5%

0.0%

2012 2013 2014

C o m p a r a b l e R e s t a u r a n t T r a f f i c

‐

Y ‐ o

‐ Y

C h a n g e


Source: Knapp Track, Company Reports, and BMO Capital Markets

Exhibit 35. Olive Garden and Carrabba’s Comparable-Restaurant Sales Year-Over-Year Change

‐4.0%

‐3.0%

‐2.0%‐1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2012 2013 2014

C o m p a r a b l e

R e s t a u r a n t S a l e s

‐

Y ‐ o

‐ Y

C h a n g e

Olive Garden Carrabba's





October 9, 2014

The ability to sustainably reverse Olive Garden trends is uncertain and the turnarou

likely would take an extended period. Darden’s management implemented initiatives

improve trends at Olive Garden, including a new logo (introduced in FY2014) and restaura

design (75 units to be remodeled in FY2015), an updated menu that launched in late Februa

with lighter and lower priced options, reinvesting cost savings in higher quality ingredients (e.

higher quality proteins), Pronto lunch menu that facilitates faster lunch visits (less than

minutes), greater leadership focus in underperforming restaurants, tablet introduction in FY20to improve guest experience, and a shift in its advertising strategy toward a balance between

brand building and price promotion message from a heavily price-related message. That said, t

ability to sustainably reverse deteriorating Olive Garden trends 1) is uncertain given the inabili

to stem the prolonged weakness in Red Lobster trends (average monthly traffic decline of 3.4

over the last five years accelerating to 9.4% decline over the last 12 months); and 2) likely wou

take an extended period, reflecting material brand degradation in the eyes of consumers, the tim

required for consumers to both recognize changes at the concept and change their visit frequen

behavior, and near-term pressures from the change in promotional strategy.

Exhibit 36. Initiatives Did Not Stem the Tide of Weak Red Lobster Trend

‐15%

‐10%

‐5%

0%

5%

10%

R e d

L o b s t e r M o n t h l y S a m e S t o r e S a l e s

‐

Y ‐ o

‐ Y C h a n g e


Although Darden’s shift in marketing strategy toward brand building from price po

promotions could have long-term benefits, we believe the shift likely will pressure comparab

restaurant sales in the short term. First, Olive Garden’s monthly comparable-restaurant sales a

the year-over-year change in the frequency of casual Italian segment “combined item specials” (i

special designed to combine items at a lower price point) show a strong relationship, as shown

Exhibit 37, according to NPD Group data. Second, given the relationship, Olive Garden like benefited incrementally from the increased use of “combined item specials” in the segment over t

last two years (given Olive Garden’s 25% share of the segment, a large portion of the promotions a

attributable to the concept) as the promotions accounted for more than half of total casual Itali

segment promotions over the last one to two years and have increased in frequency from 21%

segment promotions in CY2011 to 40% in CY2012 and 50%-plus in CY2013/CY2014. However,

Olive Garden transitions away from combined item promotions, Olive Garden’s comparab

restaurant sales growth likely will remain under pressure.




October 9, 2014

Exhibit 37. Relationship Between Italian Combined Item SpeciFrequency and Olive Garden Comps

‐12.0%

‐8.0%

‐4.0%

0.0%

4.0%

8.0%

Y ‐ o

‐ Y C h a n g e

‐

I t a l i a n V i s i t s o n

C o m b i n e d I t e m S p e c i a l a n d O l i v e G a r d e n

C o m p s

Combined Item Special Olive Garden

Source: NPD Group, Company Reports and BMO Capital Markets

Exhibit 38. Italian Category Increasingly Relied on Combined IteSpecial Promotions

10%

20%

30%

40%

50%

60%

2011 2012 2013 2014 YTD

I t a l i a n C o m b i n e d I t e m

S p e c i a l

P r o m o t i o n s a s a P e r c e n t a g e o f T o t a l

Source: NPD Group, Company Reports and BMO Capital Markets

The inability to improve Olive Garden trends could lead to a longer-than-expected pullback

Darden’s unit expansion. Although Darden’s non-Olive Garden concepts have ample runway

unit expansion, Darden appropriately reduced its overall unit expansion pace to focus on its existi

operations. That said, the uncertain ability and timeline to sustainably turn around Olive Gard

performance raises the risk that unit growth could remain low for longer than expected. For instan

Darden’s FY2015 guidance implies 2%-3% unit expansion across its portfolio, which would mark t




October 9, 2014

slowest growth since at least the recession and approximately half its average pace of unit growth ov

the last five years (4.9% growth excluding Red Lobster and acquisitions).

Headwinds to Growth From Weak Casual Dining and Macro Trends,Segment Dynamics, and Casual Dining Unit Oversupply

Poor casual dining trends create headwinds to growth across the casual dining segmen

Casual dining segment trends remain exceedingly lackluster. Average casual dining sales growof only 0.4% over the last three years trailed industry growth by an average of 250 bps reflecti

lackluster comparable-restaurant sales – led by weak traffic. Casual dining is the only su

segment across the restaurant industry to realize lower overall traffic in any of the last three yea

as traffic has declined 1%-3% in each of the last three years. Casual dining comparable-restaura

sales increased an average of only 20 bps over the last three years as traffic declined an average

160 bps (offset by 180 bps of check growth). Comparable-restaurant sales trends weakened ea

year as traffic declines accelerated. Specifically, comparable-restaurant sales growth decelerat

from 150 bps in 2011 to 50 bps in 2012, followed by a 140 bps decline in 2013 as traffic declin

accelerated from 40 bps in 2011 to 170 bps in 2012 and 270 bps in 2013 (accelerating declin

have persisted to date in 2014 as traffic fell more than 300 bps through August).

Exhibit 39. Casual Dining and Industry Sales Growth

0%

1%

2%

3%

4%

2011 2012 2013


Casual Dining Industry

Source: Euromonitor and BMO Capital Markets.




October 9, 2014

Exhibit 40. Casual, Fast Casual, and Quick-Service Traffic – Year-Over- Year Change

‐4%

‐2%

0%

2%

4%

6%

8%

10%

2011 2012 2013

T r a f f i c G r o w t h

Casual Dining Fast Casual QSR


Exhibit 41. Casual Dining Comparable-Restaurant Sales and Traffic – Year-Over-Year Change

‐5%

‐4%

‐3%

‐2%

‐1%

0%

1%

2%

3%

C a s u a l D i n i n g C o m p

a r a b l e R e s t a u r a n t

S a l e s a n d T r a f f i c

‐

Y ‐ o

‐ Y C h a n g e

Sales Traffic

Source: Knapp Track and BMO Capital Markets.

Darden is somewhat insulated from weak casual dining trends as only Olive Garde

competes in a segment that underperforms the casual dining industry, according to NP

data. For instance, on a rolling three-month basis (to mitigate monthly volatility) Italian segme

traffic declined in 22 of the last 23 months with a 2.4% average decline relative to the 1.7

decline in casual dining traffic. On the other hand, 1) steak segment traffic declined in only 8

the last 23 months, with a 0.4% average traffic increase; 2) “other ethnic” segment (in whi

Bahama Breeze competes) traffic declined in only 5 of the last 23 months with a 0.6% avera




October 9, 2014

traffic increase; and 3) although bar and grill traffic declined in 18 of the last 23 months, bar an

grill segment (in which Yard House competes) traffic outperformed the overall casual dini

industry by 65-70 bps over that period and the outperformance accelerated to 90 and 190 bps ov

the last 12 and last 6 months, respectively. Notably, Capital Grill, Eddie V’s, and Seasons 52 a

somewhat insulated from casual dining trends as these concepts compete in the fine dining an

polished casual segments that have more resilient trends than casual dining.

Exhibit 42. Italian and Casual Dining Sales – Year-Over-Year Change

‐4%

‐3%

‐

2%

‐1%

0%

1%

2%

3%

4%


‐

3 ‐ M o n t h R o l l i n g A v e r a g e

Italian Casual Dining


Exhibit 43. Italian and Casual Dining Traffic – Year-Over-Year Change

‐7%

‐6%

‐5%

‐4%

‐3%

‐2%

‐1%

0%

1%

2%


‐

3 ‐ M o n t h R o l l i n g

A v e r a g e

Italian Casual Dining





October 9, 2014

Exhibit 44. Other Ethnic and Casual Dining Sales – Year-Over-Year Change

-4%

-2%

0%

2%

4%

6%

8%

S a

l e s

G r o w

t h -

T h r e e

M o n

t h R o

l l i n g

A v e r a g e

Casual Dining Other Ethnic


Exhibit 45. Other Ethnic and Casual Dining Traffic – Year-Over-Year Chang

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

T r a

f f i c G r o w

t h - T

h r e e

M o n

t h R o

l l i n g

A v e r a g e

Casual Dining Other Ethnic





October 9, 2014

Exhibit 46. Bar & Grill and Casual Dining Sales – Year-Over-YearChange

‐2%

‐1%

0%

1%

2%

3%

4%


‐

3 ‐ M o n t h R o

l l i n g A v e r a g e

Bar & Grill Casual Dining

Bar & Grill outperformance

begins to accelerate


Exhibit 47. Bar & Grill and Casual Dining Traffic – Year-Over-Year Change

‐5%

‐4%

‐3%

‐2%

‐1%

0%

1%


‐

3 ‐ M o n t h R o l l i n g

A

v e r a g e

Bar & Grill Casual Dining

Bar & Grill outperformance

begins to accelerate


Casual dining segment traffic faces headwinds as consumers remain under pressure

terms of employment, wages, and disposable income. We believe Texas Roadhouse’s pric

value equation presents a compelling proposition in the lackluster consumer environment, whi

includes the following:




October 9, 2014

Although the U.S. unemployment rate peaked in late 2009 at 10% and steadily improved

6.1% most recently (only 70 bps above the pre-2008 average), the labor participation ra

shows a more onerous labor situation for U.S. consumers. Specifically, the U.S. lab

participation rate – the percentage of people in the U.S. that are employed or looking

work – has steadily declined since early 2008 and has yet to show any improvement. T

current labor force participation rate of 62.8% is the lowest in 36 years and is 375 bps belo

the pre-2008 average (implies a 6-8 million person shortfall relative to the average).

Exhibit 48. U.S. Labor Participation Rate

62%

63%

64%

65%

66%

67%

68%

L a b o r F o r c e P a r t i c i p a t i o n R a t e

Pre‐2008 average

Source: Bureau of Labor Statistics and BMO Capital Markets.

Similarly, the percentage of the labor force that is unemployed, marginally attached, and pa

time workers remains 310 bps above its pre-2008 averages (12.0% vs. 8.9% averag

Although this metric has steadily improved since early 2010, it is significantly mo

burdensome than the unemployment rate’s narrower gap to its pre-2008 average.




October 9, 2014

Exhibit 49. Percentage of U.S. Labor Force Unemployed, MarginallyAttached, and Employed Part-Time

5%

7%

9%

11%

13%

15%

17%

19%

U n e m p l o y e d ,

M a r g i n a l l y A t t a c h e d , a n d

P a r t

‐ T i m e W o r k e r R a

t e

Pre‐2008 average


We remain cautious about consumer spending as disposable income growth was steady in t

1%-3% range in four of the last five years. We believe it is not prudent to incorpora

stronger consumer spending in our assumptions unless there is a sustainable break-out

disposable income growth relative to the range over the last several years (i.e., environme

over the last several years is indicative of consumer spending habits in a 1%-3% disposab

income growth environment). Specifically, real disposable income growth increased 1%

2.5%, and 3% in 2011, 2012, and 2013, respectively. Following a 20 bps decline in 2013, re

disposable income growth has rebounded to only 2.5% to date in 2014.




October 9, 2014

Exhibit 50. Disposable Income Remains a Challenge Relative to Inflatio

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

Y e a r ‐ o v e r ‐ Y e a r C h a n g e i n R e a l

D i s p o s a b l e I n c o m

e

Largely rangebound


Steak/Italian shares of total casual dining orders that are in line with other major food item

coupled with less fragmentation in those segments create headwinds to growth. First, the

is a case to be made that underlying growth in segments that represent nearly 80% of Darden

sales may not outpace full-service industry growth given that the steak and Italian share of to

full-service dining entrees is in line with other major food items. For instance, 7% and 9% fu

service dining orders include steak and pasta, respectively, which is in line with sala

Asian/Indian, burger, fish, and Mexican food order shares in the 7%-10% range, according

NPD Group data. Second, the less fragmented steak and Italian segments underscore the need

Darden to continue taking share from other large chains. We estimate that the top 500 full servi

dining chains in the steak and Italian categories account for only 40%-60% market share in tcategories, which is among the highest across full-service dining segments and exceeds t

consolidated share of the 500 largest chains across full service dining of 30%-35%.




October 9, 2014

Exhibit 51. Food Share of Full Service Dining Entrées

2%

4%

6%

8%

10%

12%

14%

16%

S h a r e o

f F u

l l S e r v

i c e

D i n i n g

E n

t r e e

O r d e r s


Although the casual dining segment reduced units every year from 2009 to 2013, w

believe additional unit rationalization may occur as we estimate the segment may be near

10% oversupplied. Importantly, we believe independent restaurants and underperforming fo

segments within casual dining could lead the unit rationalization. First, the casual dining segme

appropriately began reducing units in 2009 as traffic slowed; however, unit declines slowed

each of the last three years (only 10 bps decline in 2013) despite accelerating comparab

restaurant traffic declines. Second, although traffic did not begin to decline until 2009, unit tren began outpacing traffic in 2006 driving a decline in transactions per unit after average annu

growth of nearly 100 bps in the six years prior. Third, we estimate the casual dining segment h

9%-10% unit oversupply as 8,500 fewer units would be required to re-establish the transactio

per -unit trend line achieved prior to 2006.




October 9, 2014

Exhibit 52. Casual Dining Industry May Be 10% Oversupplied in Termsof Units

41

42

43

44

45

46

47

48

T r a n s a c t i o n s P e r U n i t ( 0 0 0 )

Transactions/Unit

9%‐10% fewer

units required

to achieve

historical

growth rate


Potential for Above-Average Volatility Owing to Diverse Portfolio,Operational Changes, and Specialty Unit Growth

Darden’s business model is inherently more volatile than many of its casual dining pee

Darden’s diverse portfolio of brands across categories (e.g., casual dining, polished casual, fine dinin

and segments (e.g., Italian, steak, ethnic, bar and grill) creates a more volatile business model than t

more concentrated portfolios of its restaurant peers because it is more difficult to manage a portfo

with such diversity of brands and consumers, while spreading thin management’s focus across

brands. We would not be surprised if the volatility of Darden’s performance remains above average

the next several years as it focuses on the Olive Garden turnaround and the level of focus on Oli

Garden creates pockets of weakness in its other brands (particularly Specialty Restaurant Grou

similar to Bloomin’ Brands recently weaker trends at Carrabba’s and Bonefish as the compafocused on its Outback Steakhouse refresh. For instance, the volatility of Darden’s same-store sal

and operating margins around its average is the greatest among the casual dining companies in o

coverage as the standard deviation of its same-store sales and operating margins over the last three ye

of 1,180% and 22%, respectively, compares with the 55% and 8% averages across our covera

(excluding Darden). Similarly, Bloomin’ Brands, which operates the second-most diverse portfo

among casual dining companies in our coverage with five brands, has the second-highest deviation fro

its average same-store sales (64%) and operating margin (11%) – albeit well below the volatility

Darden’s portfolio.

Operational changes at Olive Garden and still-strong Specialty Restaurant Group u

growth could lead to temporarily higher costs, particularly labor and marketing. Operationchanges and unit expansion into new markets tend to create inefficiencies, particularly in labo

that could pressure margins in the near term. For instance, Bloomin’ Brands, Buffalo Wild Win

Chuy’s, and Texas Roadhouse all experienced labor inefficiencies over the last 12 months or so

it implemented operational changes (e.g., lunch, enhanced service models) and expanded into ne

markets. Moreover, the expansion of Specialty Restaurant Group brands into new geographi

likely will require greater brand building investments to generate brand awareness and attra




October 9, 2014

consumers in the tepid casual dining industry environment, particularly given broad-based u

expansion into new geographies by other casual dining concepts.

Greater Commodity Risk Given High Beef Exposure and FlexibPurchasing Strategy

Darden’s elevated beef exposure creates greater commodity price risk as be

fundamentals remain challenging. To be clear, there are indications that beef prices could pe

in CY2015 and become a tailwind for Darden in CY2016 as the onset of heifer retention impli

cattle supply expansion. That said, the near-term outlook for beef prices (20% of Darden

commodity basket) remains onerous, beef prices likely will become a greater headwind befo

improving, and the timing of cattle herd expansion remains somewhat uncertain. In additio

despite locking in prices, Darden employs a flexible purchasing strategy as Darden attempts

time its beef purchases based on its view of the market. Market price speculation creates grea

exposure to misjudging the price outlook that is limited by more deliberate purchasing strategi

(but also could be an advantage in a declining beef price environment).

The near-term outlook continues to imply higher beef prices as cattle supplies remain multi-decade lows and the calf crop provides visibility into tighter 2015 supplies. First, be

prices recently reached record highs as 2014 cattle supplies 1) fell to the lowest level sin

the early 1950s, 2) declined in each of the last seven years (0.5%-2.1% declines), a

3) declined more than 15% in the last 20 years. The structural decline in cattle suppl

largely reflects a shift in diets away from beef toward chicken (per capita U.S. be

consumption declined 19% over the last 20 years, while chicken consumption increas

20%), feed cost spikes in 2007/08 and 2011/12, and drought in the Southwest and Plains th

limited the ability to rebuild cattle supplies. Second, slaughter-ready cattle supplies likely w

decline again in 2015 as the 2013 calf crop (a two-year leading supply indicator) fell 1% fro

2012 levels.




October 9, 2014

Exhibit 53. U.S. Cattle Supplies

120,000

125,000

130,000

135,000

140,000

145,000

150,000

155,000

160,000

165,000

U S C a t t l e S u p p l y ( 0 0 0 H e a d )


Exhibit 54. U.S. Calf Crop

30,000

32,000

34,000

36,000

38,000

40,000

42,000

44,000

46,000

48,000

U S C a

l f C

r o p

( 0 0 0 h e a

d )

Implies lower cattle

supplies in 2015


Beef prices likely will increase further before an eventual decline as heifer retention rebuild supplies inherently removes heifers from the slaughter-ready supply. For perspectiv

2.5% heifer retention implies a 75 bps reduction in cattle available for slaughter as heife

have accounted for 30% of total slaughter over the last 10 years.

We continue to believe the onset of heifer retention over the last several months coupled w

slowly improving pasture conditions in key cattle producing regions indicates that be

supplies will begin to expand in CY2016. That said, the timing of cattle herd expansio




October 9, 2014

remains somewhat uncertain as grazing conditions could reverse with poor weathe

Specifically, while large areas of west Texas, Kansas, and Nebraska have improved 1

drought categories since the spring, the states remain at varying levels of drought (i.

“exceptional”, “extreme”, “severe”, or “moderate” per the U.S. Drought Monitor categori

and worsening drought conditions likely would slow or end near-term heifer retention.

Structural Increases in Labor Costs Could Create Margin HeadwindsThe combination of potential changes to tipped wages and healthcare legislation crea

structural headwinds to restaurant margins. The restaurant industry faces headwinds fro

potential changes in tipped wage and the implementation of the Affordable Care Act. We estim

that the casual dining segment requires 300 bps of pricing to offset a 10% change in the tip cre

and 400 bps of pricing to offset the impact of the Affordable Care Act.

There is a risk that minimum tip-credit levels could increase within the broader increase

minimum wage, although the probability, timing, and magnitude of a potential change

somewhat uncertain. A change to the tip-credit would create a meaningful headwind f

Darden and the full-service restaurant segment broadly. In a worst-case scenario, t

elimination of the tip-credit could increase casual dining labor costs by 75% in states threcognize the minimum tip credit and federal minimum wage levels as we estimate restaura

costs for tipped employees account for one-third of total labor costs and the wage for tho

workers would increase from $2.17 to $7.25. To be fair, the probability of such a seve

change appears somewhat limited. The tip credit allows full-service dining companies to p

employees below minimum wage levels assuming tips received create all-in wages abo

minimum wage levels. Currently 19 states (35%-40%) employ the federal minimum tippe

wage level of $2.13, 25 states have minimum tipped-wages above the federal minimum, a

7 states do not recognize tip credits (i.e., companies must pay full state minimum wage befo

tips).

Restaurant companies appear to believe the Affordable Care Act could create a 30-100 b

margin headwind across the industry beginning in 2015 before taking action to mitigate t

impact. To be fair, there are significant unknowns regarding the number of employees th

will opt-in to the healthcare plans provided, the level of coverage selected, and the ability

shift labor schedules to mitigate the impact (fewer hours per week in an effort to reduce

employees’ hours below the threshold). That said, the specific commentary related to t

impact of healthcare beginning in 2015 includes 1) 100 bps impact for Chipotle; 2) 30-50 b

headwind for Noodles, which likely includes some offsets; 3) minor increase in healthca

costs for Brinker (although the impact is somewhat limited as Brinker’s previous health pla

largely were compliant with ACA); and 4) a several million dollar increase for Tex

Roadhouse, which we estimate implies a 30 bps margin headwind.

Darden appears somewhat well positioned to offset potential labor cost headwinds. FirDarden likely could offset headwinds from the Affordable Care Act over a two-year peri

with pricing at the high end of its normal range as Darden tends to increase prices 1%-2%

Second, Darden’s likely FY2015 rollout of tablet technology creates opportunities to mitig

labor inflation through greater labor efficiencies.




October 9, 2014

Long Timeline for Olive Garden Turnaround Limits EarningsUpside

Darden likely will achieve FY2015 earnings at the low-end of its guidance range and the

may be downside risk as Olive Garden performance likely will continue to weight o

earnings over the next several quarters. We estimate Darden will achieve FY2015 EPS $2.23, which is at the low end of its $2.22-$2.30 guidance range and $0.01 below consens

expectations. Our estimate implies 43% earnings growth reflecting the combination

deleveraging, accelerated share repurchases, cost savings, the absence of $0.15 of shared suppo

costs that shifted to Red Lobster after the sale was completed, and solid LongHorn and Special

Restaurant Group fundamentals. That said, we believe the potential Olive Garden turnaround

the key to driving upside to expectations and 1) we believe the turnaround likely will take seve

quarters, and 2) the long timeline to achieving a turnaround creates downside risk to earnin

estimates.

We estimate deleveraging (16 pp), share repurchases (6 pp), and the absence of shar

support costs (10 pp) drive 32 pp of Darden’s expected FY2015 earnings growth. FirDarden allocated $1 billion of the proceeds from the Red Lobster sale toward balance she

deleveraging, which should contribute $0.25 to FY2015 earnings. Second, Darden allocat

the remaining $500-$600 million of Red Lobster proceeds coupled with an additional $10

$200 million of cash toward share repurchases. The $700 million buyback should contribu

$0.10 to FY2015 earnings growth. Third, $0.15 of shared support costs shifted to the divest

Red Lobster business following the completion of the deal.

LongHorn Steakhouse and Specialty Restaurant Group fundamentals are bright spots with

Darden’s portfolio. First, Darden should benefit from solid underlying steak segment tren

as the steak segment is the strong food segment within casual dining. High retail beef pric

are likely contributing to the steak segment outperformance, and LongHorn should contin

to benefit in FY2015 as retail beef prices should remain at record levels over the next

months or so. Second, the Specialty Restaurant Group should continue to benefit from fi

dining sub-category outperformance and more resilient “polished casual” trends relative

the casual dining sub-segment.

Cost savings should create G&A leverage. Specifically, we expect Darden’s G&A ratio to f

to 9% by the end of FY2015 as we estimate a likely $50 million cost savings opportunity

FY2015 ($50 million run rate by the end of the year). The cost savings likely will create

100 bps margin tailwind as we estimate FY2015 G&A ratio of 9.2% relative to 10.3%

FY2014.

Olive Garden investments and the likely slow pace of the concept’s turnaround likely w

limit additional earnings growth in FY2015. The ability to sustainably reverse deterioratiOlive Garden trends 1) is uncertain given the inability to stem the prolonged weakness in R

Lobster trends (average monthly traffic decline of 3.4% over the last five years accelerati

to a 9.4% decline over the last 12 months); and 2) likely would take an extended period

time reflecting material brand degradation in the eyes of consumers, the time required

consumers to both recognize changes at the concept and change visit frequency behavior, a

near-term pressures from the change in promotional strategy.




October 9, 2014

Over the long, term we expect Darden to generate double-digit earnings growth assumin

stabilizing Olive Garden trends; however, we believe Olive Garden trends becom

increasingly important beyond FY2015. First, our longer term earnings growth expectati

reflects ongoing strong LongHorn and Specialty Restaurant Group fundamentals, marg

expansion opportunities with the eventual decline in beef prices, the full benefit of FY20

balance sheet deleveraging, and ongoing share repurchases. Second, we do not assume Oli

Garden returns to comparable-restaurant sales growth in our longer-term earnings outlo because we believe Darden has a long road ahead to achieve a turnaround. That said, a turnarou

would significantly improve Darden’s comparable sales growth and earnings trajectory giv

Olive Garden's size in Darden’s portfolio (nearly 60% of sales). We estimate a 100 b

improvement in Olive Garden’s annual comparable-restaurant sales trends contributes 60 bps

the company's blended same-store sales growth and approximately $0.10 to EPS. Third, w

believe the Olive Garden turnaround becomes increasingly important beyond FY2015 as one-tim

benefits from FY2015 will not recur (e.g., shared support cost shift), margin opportunities like

are more limited outside of beef price decline, Darden likely will not further deleverage

balance sheet, share repurchases could slow with greater free cash flow deterioration if Oli

Garden trends do not stabilize, and the absence of an Olive Garden turnaround could augme

unit expansion plans beyond Olive Garden.




October 9, 2014

Overvalued on Fundamentals, but Cannot Rule Out StrategicActions

A little perspective on Darden’s stock performance. Darden’s stock has underperformed t

S&P 500 over the last one-, three-, and five-year periods, as well as over the last six and nin

months. Specifically, Darden’s stock increased 9%, 13%, and 52% over the last one, three a

five years, relative to a 17%, 70%, and 86% increase in the S&P 500 over the same periods. addition, Darden’s stock fell 1% and 5% over the last six and nine months, respectively, relati

to a 7% increase in the S&P 500 over both periods. However, Darden’s stock outperformed ov

the last three month (8% increase for Darden relative to flat S&P 500) as pressure from activ

investors intensified.

Our target price of $52, which implies 4% upside from current levels, reflects a combinati

of our fundamental valuation and our break-up value estimates to account for the potent

for strategic actions. We assign a 40/60 probability to 1) Darden continuing to operate in

current structure, and 2) strategic action to release value from Darden’s underlying assets. Fir

we derive a $45 price target on a fundamentals basis as we assign a lofty 20x P/E to our $2.

earnings estimate for FY2015. The 20x P/E implies a 40%-45% premium to DRI’s historicmultiple reflecting the likelihood that FY2015 earnings are depressed by recent Olive Gard

performance and the potential for materially stronger earnings if management’s turnarou

initiatives take hold. Second, we derive a $56-$57 price target based on our analysis of Darden

potential break-up value based on our FY2015 expectations.

DRI, which is trading at a forward 12-month P/E and EV/EBITDA of 22x and 10-11x,

trading well above its historical average valuation, as shown in Exhibits 55 and 56. Darden

premium multiple relative to historical levels likely reflects the growing pressures for chan

among activist investors. While we cannot justify the current multiple on a fundamental bas

DRI likely will continue to trade well above its historical multiple unless it becomes clear th

activist pressure will not result in a material changes.

Based on fundamentals, DRI likely should trade at a discount to its casual dining peers an

the stock historically trades at a 20% discount to its peer group. That said, Darden’s curre

multiple is a 15% premium to its peers. First, Darden is among the most mature casual dini

companies in our coverage, and we believe its potential for unit growth is somewhat limite

Second, the likelihood of an Olive Garden turnaround appears uncertain and likely will ta

several quarters. Given the size in DRI’s portfolio, Olive Garden's poor fundamentals like

would continue to limit comparable-restaurant sales growth and margin expansion. Thir

DRI’s dividend likely would be at risk absent an Olive Garden turnaround, and potent

share repurchases could slow as free cash flow generation deteriorates.




October 9, 2014

Exhibit 55. DRI’s Historical Forward 12-Month P/E

4

6

8

10

12

14

16

18

20

22

D R I F o r w a r d 1 2

‐ M

o n t h P E

Average: 14.0x

Source: Thomson and BMO Capital Markets

Exhibit 56. DRI’s Historical Forward 12-Month EV/EBITDA

4

5

6

78

9

10

11

12

13

D R I F o r w a r d 1 2

‐ M o n t h E V / E B I T D A

Average: 7.5x





October 9, 2014

Exhibit 57. DRI’s Historical 12-Month Forward P/E Relative to CasuDining Peers

3

6

9

12

15

18

21

24

27

30

F o r w a r d 1 2

‐ M o n t h P E

DRI Casual Dining


Exhibit 58. DRI’s Historical 12-Month Forward EV/EBITDA Relative tCasual Dining Peers

4

5

6

7

8

9

10

11

12

13

F o r w a r d 1 2

‐ M o n t h E V / E B I T D A

DRI Casual Dining


Other companies mentioned (priced as of the close on October 8, 2014):

Chuy’s (CHUY, $32.19, Market Perform)Buffalo Wild Wings (BWLD, $127.27, Outperform)Texas Roadhouse (TXRH, $28.32, Market Perform)Bloomin’ Brands (BLMN, $18.53, Outperform)Brinker (EAT, $53.12, Market Perform)Bob Evans (BOBE, $46.44, Not Rated)Chipotle (CMG, $672.10, Market Perform) Noodles (NDLS, $19.93, Market Perform)




October 9, 2014

Darden

Quarterly Income Statement

($ millions except per share data)

1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15E 3Q15E 4Q15E 2015E

Revenue 1,532 1,486 1,619 1,650 6,286 1,596 1,543 1,692 1,771 6,602

Food and beverage 454 447 486 506 1,892 502 477 513 542 2,033

Labor 491 492 509 526 2,018 508 509 528 554 2,099

Other restaurant operating costs 263 262 271 285 1,081 272 269 281 294 1,116

Total restaurant-level costs 1,208 1,201 1,266 1,316 4,991 1,283 1,255 1,322 1,390 5,248

Restaurant-level profit 323 285 353 334 1,295 313 289 371 381 1,353Selling, general, and administrative 167 169 147 163 645 152 145 154 158 609

Depreciation and amoritzation 74 76 76 78 304 79 80 81 82 323

Asset impairment 0 0 0 0 0 0 0 0 0 0

Operating profit 83 41 130 93 346 83 63 135 141 422

EBITDA 157 116 206 171 650 162 144 217 223 745

Interest expense 33 33 33 36 134 25 24 24 24 96

Pretax income 50 8 97 57 211 58 39 111 117 325

Income taxes 8 (2) 6 (9) 4 15 4 11 12 42

Net earnings from continuing ops 42 9 91 66 207 43 35 100 105 284

Discontinued operations 28 14 23 38 103 0 0 0 0 0

Non-recurring charges 0 (3) (4) (17) (24) (62) 0 0 0 (62)

Reported earnings 70 20 110 86 286 (19) 35 100 105 222

Average diluted shares outstanding 133 133 133 134 133 134 131 125 120 127

EPS from continuing ops $0.32 $0.07 $0.68 $0.49 $1.56 $0.32 $0.27 $0.81 $0.88 $2.23

EPS f rom discontinued ops $0.21 $0.10 $0.17 $0.29 $0.77 $0.00 $0.00 $0.00 $0.00 $0.00

Non-recurring charges $0.00 ($0.02) ($0.03) ($0.13) ($0.18) ($0.47) $0.00 $0.00 $0.00 ($0.49)

Reported EPS $0.53 $0.15 $0.82 $0.65 $2.15 ($0.14) $0.27 $0.81 $0.88 $1.74

Dividends per share $0.55 $0.55 $0.55 $0.55 $2.20 $0.55 $0.55 $0.55 $0.55 $2.20

Source: Company data, BMO Capital Markets estimates.

Darden

Quarterly Income Statement

Margins 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15E 3Q15E 4Q15E 2015E

Food and beverage 29.7% 30.1% 30.0% 30.6% 30.1% 31.5% 30.9% 30.3% 30.6% 30.8%

Labor 32.1% 33.1% 31.4% 31.9% 32.1% 31.9% 33.0% 31.2% 31.3% 31.8%

Other restaurant operating costs 17.1% 17.6% 16.8% 17.3% 17.2% 17.1% 17.4% 16.6% 16.6% 16.9%

Total restaurant-level costs 78.9% 80.8% 78.2% 79.8% 79.4% 80.4% 81.3% 78.1% 78.5% 79.5%

Restaurant-level profi t 21.1% 19.2% 21.8% 20.2% 20.6% 19.6% 18.7% 21.9% 21.5% 20.5%

Selling, general, and administrative 10.9% 11.4% 9.1% 9.9% 10.3% 9.5% 9.4% 9.1% 8.9% 9.2%

Depreciation and amoritzation 4.8% 5.1% 4.7% 4.7% 4.8% 4.9% 5.2% 4.8% 4.7% 4.9%

Asset impairment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Operating profit 5.4% 2.7% 8.0% 5.6% 5.5% 5.2% 4.1% 8.0% 7.9% 6.4%EBITDA 10.2% 7.8% 12.7% 10.4% 10.3% 10.1% 9.3% 12.8% 12.6% 11.3%

Interest expense 2.1% 2.2% 2.0% 2.2% 2.1% 1.6% 1.5% 1.4% 1.3% 1.5%

Pretax income 3.3% 0.5% 6.0% 3.5% 3.4% 3.6% 2.5% 6.6% 6.6% 4.9%

Tax rate 15.3% -19.2% 6.1% -15.2% 1.8% 25.4% 10.0% 10.0% 10.1% 12.8%

Net earnings from continuing ops 2.8% 0.6% 5.6% 4.0% 3.3% 2.7% 2.3% 5.9% 5.9% 4.3%

% Change 1Q14 2Q14 3Q14 4Q14 2014 1Q15 2Q15E 3Q15E 4Q15E 2015E

Revenue 12% 8% 2% 4% 6% 4% 4% 5% 7% 5%

Food and beverage 13% 10% 3% 8% 9% 11% 7% 6% 7% 7%

Labor 14% 10% 1% 3% 7% 3% 4% 4% 5% 4%

Other restaurant operating costs 22% 9% 5% 7% 10% 4% 3% 4% 3% 3%

Total restaurant-level costs 15% 10% 3% 6% 8% 6% 5% 4% 6% 5%

Restaurant-level profit -1% 3% 0% -4% -1% -3% 1% 5% 14% 5%

Selling, general, and administrative 7% 8% 4% 3% 6% -9% -14% 5% -3% -6%

Depreciation and amoritzation 16% 8% 6% 8% 9% 6% 7% 7% 5% 6%

Asset impairment NM NM NM NM -100% NM NM NM NM NM

Operating profit -22% -19% -8% -22% -17% 0% 55% 4% 52% 22%

EBITDA -8% -3% -3% -11% -6% 3% 24% 5% 30% 15%

Interest expense 18% 0% 4% 7% 7% -23% -28% -28% -34% -28%

Pretax income -36% -55% -11% -33% -27% 16% 403% 15% 105% 54%

Income taxes -43% -141% -68% -266% -91% 93% -362% 90% -236% 980%

Net earnings from continuing ops -35% -33% 0% -18% -17% 2% 280% 10% 60% 37%

Reported earnings -37% -41% -18% -35% -31% -127% 78% -9% 22% -23%

Average diluted shares outstanding 1% 1% 1% 1% 1% 1% -1% -7% -10% -4%

EPS from continuing ops -36% -33% -1% -19% -18% 1% 285% 18% 78% 43%

Reported EPS -37% -42% -20% -36% -31% -127% 81% -2% 36% -19%


Excludes Red Lobster




October 9, 2014

Darden

Annual Income Statement


% %

2012 2013 2014 2015E Change 2016E Change

Revenue 5,327 5,921 6,286 6,602 5% 6,688 1%

Food and beverage 1,554 1,744 1,892 2,033 7% 2,007 -1%

Labor 1,684 1,893 2,018 2,099 4% 2,147 2%

Other restaurant operating costs 851 980 1,081 1,116 3% 1,130 1%

Total restaurant-level costs 4,088 4,617 4,991 5,248 5% 5,284 1%Restaurant-level profit 1,239 1,304 1,295 1,353 5% 1,405 4%

Selling, general, and administrative 538 609 645 609 -6% 592 -3%

Depreciation and amoritzation 241 278 304 323 6% 351 9%

Asset impairment 0 1 0 0 NM 0 NM

Operating profit 460 416 346 422 22% 462 9%

EBITDA 701 695 650 745 15% 813 9%

Interest expense 102 126 134 96 -28% 85 -11%

Pretax income 358 290 211 325 54% 376 16%

Income taxes 77 41 4 42 980% 72 72%

Net earnings from continuing ops 281 250 207 284 37% 305 7%

Discontinued operations 196 175 103 0 NM 0 NM

Non-recurring charges (2) (12) (24) (62) NM 0 NM

Reported earnings 476 412 286 222 -23% 305 38%

Average diluted shares outstanding 133 132 133 127 -4% 123 -3%

EPS from continuing ops $2.11 $1.90 $1.56 $2.23 43% $2.47 11%

EPS from discontinued ops $1.47 $1.33 $0.77 $0.00 NM $0.00 NM

Non-recurring charges ($0.01) ($0.09) ($0.18) ($0.49) NM $0.00 NM

Reported EPS $3.57 $3.13 $2.15 $1.74 -19% $2.47 42%

Dividends per share $1.72 $2.00 $2.20 $2.20 0% $2.20 0%


Darden

Annual Income Statement

Margins 2012 2013 2014 2015E 2016E

Food and beverage 29.2% 29.4% 30.1% 30.8% 30.0%

Labor 31.6% 32.0% 32.1% 31.8% 32.1%

Other restaurant operating costs 16.0% 16.6% 17.2% 16.9% 16.9%

Total restaurant-level costs 76.7% 78.0% 79.4% 79.5% 79.0%

Restaurant-level profit 23.3% 22.0% 20.6% 20.5% 21.0%

Sel ling, general , and administrat ive 10.1% 10.3% 10.3% 9.2% 8.9%

Depreciation and amoritzation 4.5% 4.7% 4.8% 4.9% 5.2%

Asset impairment 0.0% 0.0% 0.0% 0.0% 0.0%

Operating profit 8.6% 7.0% 5.5% 6.4% 6.9%

EBITDA 13.2% 11.7% 10.3% 11.3% 12.2%

Interest expense 1.9% 2.1% 2.1% 1.5% 1.3%

Pretax income 6.7% 4.9% 3.4% 4.9% 5.6%

Tax rate 21.4% 14.0% 1.8% 12.8% 19.0%

Net earnings from continuing ops 5.3% 4.2% 3.3% 4.3% 4.6%

% Change 2012 2013 2014 2015E 2016E

Revenue 7% 11% 6% 5% 1%

Food and beverage 12% 12% 9% 7% -1%

Labor 5% 12% 7% 4% 2%

Other restaurant operating costs 7% 15% 10% 3% 1%

Total restaurant-level costs 8% 13% 8% 5% 1%

Restaurant-level profit 4% 5% -1% 5% 4%

Selling, general, and administrative 0% 13% 6% -6% -3%

Depreciation and amoritzation 10% 15% 9% 6% 9%

Asset impairment -89% 250% -100% NM NM

Operating profit 6% -9% -17% 22% 9%

Interest expense 9% 23% 7% -28% -11%

Pretax income 5% -19% -27% 54% 16%

Income taxes 7% -47% -91% 980% 72%

Net earnings from continuing ops 4% -11% -17% 37% 7%

Reported earnings 0% -13% -31% -23% 38%

Average diluted shares outstanding -5% -1% 1% -4% -3%

EPS from continuing ops 10% -10% -18% 43% 11%

Reported EPS 5% -12% -31% -19% 42%


Excludes Red Lobster




October 9, 2014

Darden

Balance Sheet


2012 2013 2014 1Q15 F2015E F2016E

Assets

Cash 71 88 98 414 74 105

Accounts receivable, net 71 85 84 86 83 84

Inventories 404 357 197 202 190 191

Prepaid income taxes 12 6 11 0 0 0

Prepaid expenses and other current assets 75 83 72 75 72 72

Deferred income taxes 125 145 124 166 124 124

Assets held for sale 0 0 1,390 41 0 0

Total current assets 758 765 1,976 983 543 576

PP&E, net 3,951 4,391 3,381 3,380 3,393 3,427

Goodwill 539 908 873 873 873 873

Trademarks 465 574 575 575 575 575

Other assets 232 299 296 293 296 296

Total assets 5,944 6,937 7,101 6,103 5,679 5,747

Liabilities

Accounts payable 261 297 233 213 293 297

Short-term debt 263 165 208 0 108 108

Accrued payroll 154 151 126 101 126 126

Accrued income taxes 0 17 0 340 340 340

Other accrued taxes 60 68 65 66 65 65

Unearned revenues 232 271 300 266 330 360

Current portion of long-term debt 350 0 15 115 160 160

Other current liabilities 454 450 457 469 469 469

Liabilities associated with assets held for sale 0 0 216 0 0 0Total current liabilities 1,774 1,416 1,619 1,570 1,890 1,924

Long-term debt 1,454 2,496 2,481 1,469 1,351 1,351

Deffered income taxes 313 356 286 280 361 361

Deferred rent 204 231 206 213 206 206

Obligations under capital leases 54 53 52 51 52 52

Other long-term liabilities 303 325 300 379 400 400

Total liabilities 4,102 4,877 4,944 3,962 4,261 4,294

Common stock 2,519 1,208 1,302 817 1,302 1,302

Retained earnings 3,173 999 996 1,440 942 976

Treasury stock -3,696 -8 -8 -8 -708 -708

Accumulated other comprehensive income -147 -133 -128 -103 -113 -113

Unearned compensation -7 -6 -5 -5 -5 -5

Shareholders' equity 1,842 2,060 2,157 2,142 1,418 1,452

Total liabilities & equity 5,944 6,937 7,101 6,103 5 ,679 5,747


Darden

Balance Sheet

Capital Structure 2012 2013 2014 1Q15 F2015E F2016E

Short-term debt 613 165 223 115 268 268

Long-term debt 1,454 2,496 2,481 1,469 1,351 1,351

Total debt 2,066 2,661 2,704 1,584 1,619 1,619

Net debt 1,996 2,573 2,606 1,170 1,545 1,514

Deferred income taxes 188 212 162 114 237 237

Shareholders equity 1,842 2,060 2,157 2,142 1,418 1,452

Total capitalization 4,097 4,932 5,023 3,840 3,275 3,308

Book value per share $13.83 $15.65 $16.19 $15.98 $11.13 $11.79

Total assets 5,944 6,937 7,101 6,103 5,679 5,747

Goodwill 539 908 873 873 873 873

Net assets 5,406 6,029 6,228 5,231 4,807 4,874

PP&E as a % of net assets 73.1% 72.8% 54.3% 64.6% 70.6% 70.3%

Internal liquidity ratios 2012 2013 2014 1Q15 F2015E F2016E

Quick 0.1 0.1 0.1 0.3 0.1 0.1Current 0.4 0.5 1.2 0.6 0.3 0.3

Inventory turnover days (YTD) 23.6 27.8 14.2 14.1 13.0 13.0

Plus A/R turnover days (YTD) 3.2 5.2 4.8 4.9 4.5 4.5

= Operating cycle days 26.8 33.0 19.0 19.0 17.5 17.5

Less A/P turnover days (YTD) 15.2 23.1 16.8 14.9 16.0 16.0

Cash cycle 11.6 9.9 2.2 4.1 1.5 1.5

Note: YTD Sales 7,999 5,921 6,286 1,596 6,602 6,688

Note: YTD COGS 6,163 4,617 4,991 1,283 5,248 5,284

Note: Number of Days 360 360 360 90 360 360





October 9, 2014

Darden

Cash Flow Statement


2012 2013 2014 2015E 2016E

Net earnings 279 237 183 222 305

Depreciation and amortization 241 278 304 323 351

Asset impairment charges 0 1 18 0 0

Amortization of loan costs 7 13 14 0 0

Stock-based compensation 47 40 39 39 39Changes in working capital:

Receivables (11) (11) (2) 1 (1)

Inventories (53) (2) (26) 7 (1)

Prepaid expenses and other assets (3) (11) 1 0 0

Payables 10 4 27 60 4

Accrued payroll (8) (6) 8 0 0

Prepaid/accrued income taxes (16) 23 (21) (351) 0

Other accrued taxes (3) 8 0 0 0

Unearned revenues 26 34 29 (30) (30)

Other current liabilities (64) (57) (15) (12) 0

Net change in working cap (122) (18) 1 (324) (29)

Contributions to pension and postretirement plan (23) (3) (1) 0 0

Loss on disposal of PP&E 4 5 3 0 0

Change in cash surrender value of trust-owned life insurance 4 (17) (12) 0 0

Deferred income taxes 38 (0) (45) 75 0

Change in deferred rent 17 26 30 0 0

Change in other assets and liabilities 16 24 19 100 0

Excess tax benefit on stock-based comp 1 0 0 0 0

Other 5 9 4 4 4

Cash flow from operations 514 594 555 438 670

Capital expenditures (458) (510) (415) (335) (385)

Note: Payout ratio 47.1% 62.7% 100.7% 124.1% 88.9%

Dividends (224) (258) (288) (275) (271)

Free cash flow (168) (174) (148) (172) 14

Proceeds from divestitures 0 0 0 1,600 0

Acquisitions, net of cash acquired (59) (577) 0 0 0

Share repurchases (305) 12 58 (700) 0

Available for debt paydown (531) (739) (90) 728 14

Source: Company data, BMO Capital Markets estimates

Darden

Cash Flow Statement

Cash flow efficiency 2012 2013 2014 2015E 2016E

Cash flow from ops. as % of sales 9.6% 10.0% 8.8% 6.6% 10.0%

Cash flow from ops. as % of net income 183.9% 250.5% 303.2% 197.6% 219.6%

Net free cash flow as % of sales -3.2% -2.9% -2.3% -2.6% 0.2%

Net free cash flow as % of net income -60.2% -73.3% -80.6% -77.7% 4.5%

Capex/Sales 8.6% 8.6% 6.6% 5.1% 5.8%

Capex/Depreciation and amortization 1.9 1.8 1.4 1.0 1.1

Financial Risk Ratios 2012 2013 2014 2015E 2016E

Debt/Capital 50.4% 53.9% 53.8% 49.4% 48.9%

Net Debt/ Capital 48.7% 52.2% 51.9% 47.2% 45.7%

EBITDA/ Interest 6.9 5.5 4.8 7.7 9.5

Cash flow from ops. as % of debt 24.9% 22.3% 20.5% 27.0% 41.4%

Cash flow from ops. to interest 5.0 4.7 4.1 4.5 7.9

Net free cash flow as % of debt -8.1% -6.5% -5.5% -10.6% 0.8%

Net free cash flow to interest -1.6 -1.4 -1.1 -1.8 0.2

Source: Company data, BMO Capital Markets estimates




October 9, 2014

Darden Restaurants, Inc. (DRI)

Last Price ( October 3, 2014): $51.59Sources: IHS Global Insight, Thomson Reuters, BMO Capital Markets.

10

20

30

40

50

10

20

30

40

50

Quarterly Price (US$)

1995 2000 2005 201050

100

150

200

250

300

50

100

150

200

250

300

DRI Relative to S&P 500

DRI Relative to Hotels Restaurants/Leis.

50

100

0

1

2

Revenue / Share - (US$)

Price / Revenue

1995 2000 2005 2010

2

4

0

20

40

EPS (4 Qtr Trailing) - (US$)

Price / Earnings

FYE EPS P/E DPS Yield% Payout BV P/B ROE(May.) US$ US$ US$Hi - Lo Hi - Lo Hi - Lo% %

1995 0.45 16.9 15.6 0.00 0.0 0.0 0 5.0 1.5 1.41996 0.50 18.7 13.0 0.05 0.8 0.6 11 5.1 1.8 1.3 101997 0.23 39.9 19.6 0.05 1.2 0.6 23 4.7 1.9 1.0 51998 0.45 26.9 11.3 0.05 1.0 0.4 12 4.8 2.5 1.1 91999 0.64 24.3 14.8 0.05 0.6 0.3 8 4.9 3.2 1.9 132000 0.87 17.9 9.5 0.05 0.6 0.3 6 5.2 3.0 1.6 172001 1.06 18.5 9.7 0.05 0.5 0.3 5 5.9 3.3 1.8 192002 1.29 23.1 11.9 0.05 0.3 0.2 4 6.6 4.5 2.3 212003 1.31 21.3 12.6 0.08 0.5 0.3 6 7.3 3.9 2.3 192004 1.50 17.1 11.5 0.08 0.5 0.3 5 7.9 3.3 2.2 202005 1.78 18.6 10.8 0.08 0.4 0.2 4 8.3 4.0 2.3 222006 2.16 19.9 13.0 0.40 1.4 0.9 19 8.4 5.1 3.4 262007 1.35 34.5 24.4 0.46 1.4 1.0 34 9.1 5.1 3.6 152008 2.54 18.7 8.2 0.72 3.4 1.5 28 10.1 4.7 2.1 262009 2.65 15.6 5.0 0.80 6.1 1.9 30 12.3 3.4 1.1 242010 NA 16.7 10.2 1.00 3.3 2.0 34 13.5 3.6 2.2 na2011 NA 15.2 10.8 1.28 3.5 2.5 37 14.3 3.6 2.6 na2012 NA 15.6 11.3 1.72 4.2 3.1 48 15.8 3.5 2.6 na2013 3.14 18.4 14.0 2.00 4.5 3.5 64 16.4 3.5 2.7 20

Current* 1.83 28.1 2.20 4.3 >100 16.1 3.2 11

Range*: 39.9 5.0 6.1 0.0 5.1 1.0

Growth(%):5 Year: -8.2 17.1 5.6

10 Year: 1.7 39.3 7.4

* Current EPS is the 4 Quarter Trailing to Q2/2014.* Valuation metrics are based on high and low for the fiscal year.* Range indicates the valuation range for the period presented above.

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65

1) NR

Target Price(US$)

Share Price(US$)

2012 2013 201440

60

80

100

120

40

60

80

100

120

DRI Relative to S&P 500

DRI Relative to Hotels Restaurants/Leis.

2

4

2

4

BMO 2015FY EPS ( Sep 14 = NA US$)

First Call 2015FY Cons.EPS ( Sep 14 = 2.24 US$)

2012 2013 20142

3

2

3

BMO 2016FY EPS ( Sep 14 = NA US$)

First Call 2016FY Cons.EPS ( Sep 14 = 2.48 US$)

DRI - Rating as of 25-Oct-11 = Mkt

Date Rating Change Share Price

1 3-Apr-14 Mkt to NR $51.97



BMO Capital Markets Darden Restaurants

October 9, 2014

IMPORTANT DISCLOSURES

Analyst's Certification

I, Andrew Strelzik, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. Ialso certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in thisreport.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their

affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generatingnew ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA (exception:Alex Arfaei). These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the NASD Rule 2711and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysaccount.

Methodology and Risks to Price Target/Valuation

Methodology: Our $52 price target implies a blend of our fundamental valuation and our break-up value estimates.Risks: Aggressive strategic actions to release value, a stronger/earlier turnaround in Olive Garden trends, more aggressive share repurchases, improvingmacroeconomic conditions, and multiple expansion if results exceed expectations.

Distribution of Ratings (June 30, 2014)

Rating

Category BMO Rating

BMOCM US

Universe*

BMOCM US

IB Clients**

BMOCM US

IB Clients***

BMOCM

Universe****

BMOCM

IB Clients*****

Starmine

UniverseBuy Outperform 44.1% 21.1% 67.5% 43.3% 58.6% 55.4%

Hold Market Perform 50.9% 8.4% 31.3% 51.2% 39.9% 39.5%

Sell Underperform 5.0% 3.4% 1.3% 5.5% 1.5% 5.1%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services a

percentage within ratings category.*** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking

services as percentage of Investment Banking clients.**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services a

percentage of Investment Banking clients.

Rating and Sector Key (as of April 5, 2013):

We use the following ratings system definitions:OP = Outperform - Forecast to outperform the analyst’s coverage universe on a total return basisMkt = Market Perform - Forecast to perform roughly in line with the analyst’s coverage universe on a total return basisUnd = Underperform - Forecast to underperform the analyst’s coverage universe on a total return basis(S) = speculative investment;

NR = No rating at this time;R = Restricted – Dissemination of research is currently restricted.

BMO Capital Markets' seven Top 15 lists guide investors to our best ideas according to different objectives (CDN Large Cap, CDN Small Cap, USLarge Cap, US Small cap, Income, CDN Quant, and US Quant have replaced the Top Pick rating).

Prior BMO Capital Markets Ratings System (January 4, 2010–April 4, 2013):

http://researchglobal.bmocapitalmarkets.com/documents/2013/prior_rating_system.pdf

Other Important Disclosures

For Other Important Disclosures on the stocks discussed in this report, please go tohttp://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx or write to Editorial Department, BMO Capital Markets, 3Times Square, New York, NY 10036 or Editorial Department, BMO Capital Markets, 1 First Canadian Place, Toronto, Ontario, M5X 1H3.

Dissemination of Research

BMO Capital Markets Equity Research is available via our website https://research-ca.bmocapitalmarkets.com/Public/Secure/Login.aspx?ReturnUrl=/Member/Home/ResearchHome.aspx . Institutional clients may also receive ou


http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx

https://research-ca.bmocapitalmarkets.com/Public/Secure/Login.aspx?ReturnUrl=/Member/Home/ResearchHome.aspx




http://researchglobal.bmocapitalmarkets.com/Public/Company_Disclosure_Public.aspx




BMO Capital Markets Darden Restaurants

research via Thomson Reuters, Bloomberg, FactSet, and Capital IQ. Research reports and other commentary are required to be simultaneouslydisseminated internally and externally to our clients.

General Disclaimer

BMO Capital Markets” is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and itssubsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc.,BMO Capital Markets Limited and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries (“BMO Financial Group”) haslending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and

projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMOCapital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain informationand opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respectthereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, orreliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. Theinformation in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not

be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not anoffer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities ofissuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short positionin many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader shouldassume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or notto buy or sell securities of issuers discussed herein.

Additional Matters To Canadian Residents: BMO Nesbitt Burns Inc. furnishes this report to Canadian residents and accepts responsibility for the contents herein subject tothe terms set out above. Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO

Nesbitt Burns Inc.The following applies if this research was prepared in whole or in part by Andrew Breichmanas, Iain Reid, Tony Robson, David Round, Edward Sterckor Brendan Warn: This research is not prepared subject to Canadian disclosure requirements. This research is prepared by BMO Capital MarketsLimited and subject to the regulations of the Financial Conduct Authority (FCA) in the United Kingdom. FCA regulations require that a firm providingresearch disclose its ownership interest in the issuer that is the subject of the research if it and its affiliates own 5% or more of the equity of the issuer.Canadian regulations require that a firm providing research disclose its ownership interest in the issuer that is the subject of the research if it and itsaffiliates own 1% or more of the equity of the issuer that is the subject of the research. Therefore BMO Capital Markets Limited will only disclose itsand its affiliates ownership interest in the subject issuer if such ownership exceeds 5% of the equity of the issuer.To U.S. Residents: BMO Capital Markets Corp. furnishes this report to U.S. residents and accepts responsibility for the contents herein, except to theextent that it refers to securities of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do sothrough BMO Capital Markets Corp.To U.K. Residents: In the UK this document is published by BMO Capital Markets Limited which is authorised and regulated by the FinanciaConduct Authority. The contents hereof are intended solely for the use of, and may only be issued or passed on to, (I) persons who have professionalexperience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order2005 (the “Order”) or (II) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together referred to as “relevant

persons”). The contents hereof are not intended for the use of and may not be issued or passed on to, retail clients.

Unauthorized reproduction, distribution, transmission or publication without the prior written consent of BMO Capital Markets is strictly prohibited.

Click here for data vendor disclosures when referenced within a BMO Capital Markets research document.

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment acorporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal acommercial banking clients are served by BMO Harris Bank N.A. (Member FDIC). Investment and corporate banking services are provided in Canada and the through BMO Capital Markets.

BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (Memb

FDIC), BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC) aBMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and AsBMO Capital Markets Limited in Europe and Australia, and BMO Advisors Private Limited in India.

Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO Capital Markets” is a trademark of Bank of Montreused under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.

® R i t d t d k f B k f M t l i th U it d St t C d d l h

http://research-ca.bmocapitalmarkets.com/documents/C17EA078-97CF-4438-AC2C-B5A8118F8C4B.PDF

http://research-ca.bmocapitalmarkets.com/documents/C17EA078-97CF-4438-AC2C-B5A8118F8C4B.PDF

strategic actions balance weak olive garden fundamentals

Documents