Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Quarter ended August 30, 2020 (first quarter of fiscal 2021); unaudited. Comparable quarter ended August 25, 2019. Amounts are in U.S. dollars.
Business context
Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and The Capital Grille. The quarter was heavily affected by COVID-19 restrictions and reduced guest traffic. By the filing date, 97% of restaurants could open dining rooms to some extent, subject to local restrictions.
Financial performance
| Metric | Q1 FY2021 | Comparable quarter | Change |
|---|---|---|---|
| Sales | $1,527.4 million | $2,133.9 million | Down 28.4% |
| Same-restaurant sales | Down 29.0% | ||
| Operating income | $56.6 million | $201.5 million | Down 71.9% |
| Operating margin | 3.7% | 9.4% | |
| Earnings from continuing operations | $37.3 million | $171.8 million | Down 78.3% |
| Net earnings | $36.1 million | $170.6 million | Down 78.8% |
| Diluted EPS from continuing operations | $0.28 | $1.38 | Down 79.7% |
| Operating cash flow, continuing operations | $206.7 million | $253.8 million | |
| Capital expenditures | $42.2 million | $117.1 million |
Continuing-operations margin was 2.4%, compared with 8.1% a year earlier. Food and beverage costs were 28.4% of sales (28.3%); labor was 32.8% (33.0%); restaurant expenses were 19.0% (17.5%); marketing was 1.9% (3.2%); and general and administrative expenses were 8.4% (4.6%). The filing attributes margin pressure principally to sales deleverage, partly offset by lower marketing, labor efficiencies and cost savings.
Segment sales declined across the portfolio: Olive Garden 27.7%, LongHorn Steakhouse 16.3%, Fine Dining 38.9% and Other Business 38.9%. Olive Garden segment margin rose to 22.1% from 21.0%; margins declined at LongHorn (15.1% versus 16.5%), Fine Dining (11.9% versus 14.9%) and Other Business (12.8% versus 14.1%).
Liquidity, debt and balance sheet
- Cash and cash equivalents were $654.6 million at August 30, down from $763.3 million at May 31, 2020.
- Long-term debt was $929.1 million; short-term debt was zero. Darden repaid its $270 million 364-day term loan before maturity during the quarter.
- The $750 million revolving credit facility had no outstanding balance, and the company reported compliance with its covenants. The facility matures October 27, 2022.
- Current assets were $971.0 million and current liabilities were $1,543.9 million. Operating lease liabilities included $4,264.3 million non-current; total lease liabilities, including finance leases, were $4,821.0 million.
- Cash used in financing was $273.6 million, largely reflecting the term-loan repayment. No dividends were paid during the quarter; the board later declared a $0.30-per-share dividend for payment November 2, 2020.
Outlook, commentary and notable items
- Management expected second-quarter fiscal 2021 sales to be approximately 82% of second-quarter fiscal 2020 sales.
- For fiscal 2021, management expected to open 35–40 net new restaurants and incur $250–$300 million of capital expenditures.
- A corporate restructuring responding to pandemic-related sales conditions generated $47.8 million of costs, including $38.1 million cash and $9.7 million non-cash. Management said these charges reduced continuing-operations diluted EPS by approximately $0.28. The remaining accrued liability was $34.0 million, expected to be paid by the second quarter of fiscal 2022.
- The quarter’s $7.5 million of other expense principally reflected a postretirement benefit plan valuation adjustment associated with restructuring. The effective tax rate was a benefit of 14.8%, versus a 9.8% tax expense rate a year earlier.
- Management warned that further outbreaks could reduce capacity or suspend dine-in service. Other stated risks include labor and commodity costs, food safety, leases, competition, supply interruptions, litigation and impairment of goodwill or other assets.
Most important facts for investors to verify
- Whether restaurant capacity and guest traffic recover sufficiently to meet the second-quarter sales outlook, given ongoing COVID-19 restrictions and the 29% same-restaurant sales decline.
- Whether restructuring costs, cost savings and restaurant-level margins develop as expected, particularly outside Olive Garden.
- Cash generation and liquidity needs, including the ability to manage substantial lease obligations and maintain credit-facility covenant compliance.
- Whether the declared dividend and planned restaurant openings and capital spending remain appropriate as conditions change.
- Potential exposure from assigned-lease guarantees: maximum future payments were $119.8 million; management considered third-party default risk remote. The filing also reported a $10.0 million expected-credit-loss liability for these guarantees.