Darden Restaurants, Inc. — Fiscal 2017 Third-Quarter 10-Q
Reporting period: Unaudited quarter and nine months ended February 26, 2017; comparisons are with the periods ended February 28, 2016. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse and The Capital Grille. It reported 1,545 company-owned restaurants at quarter-end.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $1,878.7 million, up 1.7% | $5,235.6 million, up 1.8% |
| Same-restaurant sales | Up 0.9% | Up 1.3% |
| Operating income | $229.5 million, up 3.8% | $507.3 million, up 16.1% |
| Earnings from continuing operations | $166.3 million; diluted EPS $1.32 | $357.1 million; diluted EPS $2.84 |
| Net earnings | $165.6 million; diluted EPS $1.32 | $355.3 million; diluted EPS $2.82 |
| Operating margin | 12.2%, versus 12.0% | 9.7%, versus 8.5% |
Revenue growth reflected same-restaurant sales and ten net additional company-owned restaurants since the prior-year third quarter. Segment profit was $383.9 million for the quarter and $955.8 million for the nine months. Olive Garden’s nine-month same-restaurant sales rose 2.0%; LongHorn’s rose 0.3%. Guest counts declined at both brands in the quarter, while higher average checks supported sales. Across other brands, Eddie V’s had the strongest quarterly same-restaurant sales growth (4.7%); Yard House was down 1.0%.
Cash flow, balance sheet and capital
- Continuing-operations operating cash flow was $703.2 million for the nine months, versus $597.2 million. Capital expenditures were $214.0 million, versus $172.8 million.
- Cash and cash equivalents were $391.4 million at February 26, 2017, up from $274.8 million at fiscal year-end. Current assets were $884.9 million and current liabilities $1,232.1 million; the company notes it can carry current liabilities above current assets given its cash-sales model.
- Long-term debt, less current portion, was $440.7 million. The $750 million revolving credit facility was undrawn, and Darden reported compliance with its covenants. Debt consisted principally of $150 million of 6.0% notes due 2035 and $300 million of 6.8% notes due 2037. The filing reports debt fair value of $518.6 million.
- Nine-month dividends declared were $1.68 per share; dividends paid were $208.9 million. Darden repurchased $214.9 million of shares during the nine months.
Changes, outlook and notable items
- Reported earnings growth benefited materially from lower net interest expense: $9.3 million in the quarter versus $83.1 million, and $28.7 million for nine months versus $162.8 million. Prior-year results included debt-retirement costs of $71.3 million in the quarter and $106.8 million for nine months. Prior-year discontinued operations also included Red Lobster-related gains; nine-month 2016 discontinued-operations earnings were $16.1 million, compared with a $1.8 million loss in 2017.
- Management cited food-cost deflation and cost savings as support for food-cost rates. Restaurant expenses rose as a share of sales in the quarter, principally from utilities and rent; nine-month rent expense was affected by real-estate transactions. Labor-rate inflation was offset by sales leverage and productivity over nine months.
- For fiscal 2017, excluding Cheddar’s, management expected same-restaurant sales growth of approximately 1.5%, continuing-operations sales growth of approximately 2.3%, 24–28 new restaurants and capital expenditures of $310–$350 million.
- After quarter-end, Darden agreed to acquire Cheddar’s Scratch Kitchen for $780 million in cash plus $10 million for specified transaction-related tax attributes. The acquisition was expected to close in fiscal Q4, subject to customary conditions, and was to be funded with new debt and cash. Completion, integration, synergies and the added debt are material uncertainties.
- Standby letters of credit totaled $136.5 million. Guarantees on assigned leases had a maximum potential payment of $143.2 million; management considered third-party default remote and recorded no liability. Darden said ordinary-course litigation was not expected to have a material adverse effect.
Key facts for investors to verify
- How much earnings improvement reflects ongoing restaurant operations versus prior-year debt-retirement costs, lower interest expense and discontinued-operation items.
- Whether same-restaurant sales and guest counts support the full-year outlook, particularly at brands with declining traffic or sales.
- The final financing, leverage and integration costs for the Cheddar’s acquisition, and whether its expected benefits are realized.
- Whether planned capital spending, dividends and repurchases remain supportable alongside acquisition financing and operating cash needs.
- Potential exposure from lease guarantees, litigation, food safety, labor and commodity costs, and risks to goodwill or trademarks. Management reported effective disclosure controls and no material quarter-period change in internal control over financial reporting.