Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended August 26, 2012; comparisons are with the three months ended August 28, 2011. Darden operates full-service restaurant brands in the United States and Canada.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Sales | $2.035 billion | $1.942 billion |
| Earnings from continuing operations | $111.0 million | $106.8 million |
| Net earnings | $110.8 million | $106.6 million |
| Diluted EPS from continuing operations | $0.85 | $0.78 |
| Diluted net EPS | $0.85 | $0.78 |
| Operating cash flow, continuing operations | $253.2 million | $118.3 million |
| Capital expenditures | $149.3 million | $138.2 million |
Sales increased 4.8%; continuing-operations earnings rose 3.9%, and continuing-operations diluted EPS rose 9.0%, benefiting in part from fewer diluted shares following repurchases. Net earnings included a $0.2 million after-tax loss from discontinued operations. The effective tax rate fell to 24.1% from 27.3%.
Restaurant-level cost of sales excluding depreciation declined to 76.2% of sales from 77.6%. Food and beverage costs were 30.4% of sales (30.6% prior year), restaurant labor 30.8% (31.6%), and restaurant expenses 15.0% (15.4%). Offsetting these improvements, SG&A increased to 10.6% of sales from 9.4%, depreciation and amortization to 4.6% from 4.3%, and net interest to 1.4% from 1.1%. Earnings before tax were 7.2% of sales versus 7.6%; continuing-operations earnings were 5.5% of sales in both periods.
Business and material period changes
- Growth reflected 92 net new company-owned restaurants and 11 Eddie V’s restaurants added since the prior-year quarter. The company reported 2,006 restaurants at quarter-end, compared with 1,903 a year earlier.
- Same-restaurant sales: Olive Garden +0.3%, Red Lobster −2.6%, and LongHorn Steakhouse +3.6%. Capital Grille, Bahama Breeze, and Seasons 52 reported increases of 4.0%, 1.2%, and 1.3%, respectively.
- After quarter-end, on August 29, 2012, Darden completed its $585 million all-cash acquisition of Yard House USA. The filing says purchase-price allocation was still being completed.
- On August 28, Darden issued $80 million of 3.790% senior notes due 2019 and $220 million of 4.520% notes due 2024, after entering a $300 million term-loan agreement on August 22.
Cash, debt, and liquidity
At August 26, cash was $51.5 million, current assets $726.8 million, and current liabilities $1.861 billion. Short-term debt was $245.7 million; current long-term debt was $350.0 million; and long-term debt, less current portion, was $1.454 billion. The filing reports carrying value of long-term debt, including current amounts, of approximately $1.80 billion. The $750 million revolving facility had no direct borrowings, but backed commercial paper and letters of credit; $495.8 million remained available. Darden reported compliance with credit covenants.
Operating cash flow increased substantially, which management attributed principally to timing of inventory purchases, income-tax accruals and payments, and performance-compensation payments. Cash used in investing activities was $158.8 million and cash used in financing activities was $116.1 million. Operating cash flow less capital expenditures was approximately $103.9 million. The quarterly dividend was raised to $0.50 per share; the company repurchased 1.0 million shares for $52.2 million.
Outlook, risks, and contingencies
- The filing identifies fiscal 2013 expectations for restaurant growth, U.S. same-restaurant sales, total sales growth, diluted EPS growth, and capital expenditures, but the supplied filing text does not provide clear numerical targets.
- Management said internal cash generation and available credit were expected to fund fiscal 2013 capital spending, dividends, share repurchases, and other operations. Results are seasonal and a quarter is not necessarily indicative of full-year performance.
- Risks highlighted include food safety, competition and consumer demand, labor and commodity cost pressures, weather and supply interruptions, cybersecurity, regulatory changes, and integrating Yard House and the additional acquisition-related debt. Management also noted potential impairment and covenant risks; a write-down exceeding approximately $860 million would have been needed at quarter-end to breach the stated leverage limit, though seasonality could reduce that threshold.
- Darden reported ordinary-course lawsuits and claims and did not expect their resolution, individually or collectively, to materially adversely affect its financial position, results, or liquidity. It reported no material change in risk factors from its latest Form 10-K.
Important facts for investors to verify
- Yard House acquisition financing, integration progress, and the final purchase-price allocation.
- Whether same-restaurant sales weakness at Red Lobster and guest-count declines at Olive Garden persist.
- How much of the operating-cash-flow increase reflects timing effects versus sustainable improvement.
- Debt maturities, refinancing costs, liquidity, and compliance with credit-facility covenants following the acquisition.
- Fiscal 2013 guidance values, which are not clearly stated in the supplied filing text.