Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended February 26, 2012. Comparisons are with the periods ended February 27, 2011, except balance-sheet comparisons, which are with May 29, 2011. Darden operates full-service restaurant brands in the United States and Canada. Financial statements are unaudited.
Key financial results
| Metric | Q3 FY2012 | Q3 FY2011 | Nine months FY2012 | Nine months FY2011 |
|---|---|---|---|---|
| Sales | $2,159.7 million | $1,976.8 million | $5,933.2 million | $5,509.8 million |
| Earnings from continuing operations | $164.1 million | $151.7 million | $325.0 million | $340.8 million |
| Diluted EPS from continuing operations | $1.25 | $1.08 | $2.43 | $2.42 |
| Net earnings | $164.1 million | $151.2 million | $324.3 million | $338.8 million |
| Operating cash flow, continuing operations | Not provided for quarter | Not provided for quarter | $550.5 million | $662.7 million |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $483.4 million | $390.1 million |
Q3 sales increased 9.3%; continuing-operations earnings rose 8.2%, and diluted continuing-operations EPS rose 15.7%. For the nine months, sales grew 7.7%, while continuing-operations earnings declined 4.6%; diluted EPS increased 0.4%, aided by fewer average diluted shares following repurchases. Net margin from continuing operations was approximately 7.6% for Q3 and 5.5% for the nine months, versus 7.7% and 6.2%, respectively, a year earlier. Reported earnings-before-tax margins were 10.1% for both Q3 periods and 7.4% versus 8.4% for the nine-month periods.
Q3 blended U.S. same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse increased 4.1%, compared with 2.6% for the cited Knapp-Track benchmark. By brand, Q3 same-restaurant sales rose 2.0% at Olive Garden, 6.0% at Red Lobster and 6.7% at LongHorn. Nine-month blended same-restaurant sales rose 3.0%; Olive Garden fell 1.0%, while Red Lobster and LongHorn rose 7.8% and 6.0%.
Financial position, liquidity and capital returns
- At February 26, 2012, cash was $88.5 million; current assets were $805.3 million and current liabilities were $1,898.3 million, a working-capital deficit of approximately $1.09 billion. Management says the cash-based restaurant business can operate with current liabilities exceeding current assets.
- Debt comprised $287.7 million of short-term debt, $349.9 million of current long-term debt and $1,452.8 million of long-term debt, or approximately $2.09 billion in total borrowings. The $350 million senior notes due October 2012 were classified as current; management expected to refinance them with unsecured debt securities.
- The $750 million revolving facility had no direct borrowings outstanding; it backed $287.7 million of commercial paper and $70.9 million of letters of credit. Reported remaining availability was $391.4 million. The company was in compliance with facility covenants.
- Nine-month operating cash flow was $550.5 million, down from $662.7 million. Investing activities used $559.8 million, including $483.4 million of capital expenditures and $58.6 million for the Eddie V’s acquisition. Simple operating cash flow less capital expenditures was $67.1 million, versus $272.6 million in the prior period.
- Financing activities provided $27.4 million, including issuance of $400 million of 4.5% senior notes due 2021. Darden repurchased 7.9 million shares for $357.0 million and paid $168.6 million in dividends during the nine months. The quarterly dividend was increased to $0.43 per share; the Board declared another $0.43 dividend payable May 1, 2012.
Material changes, management commentary and risks
- Sales growth was driven by 80 net new company-owned restaurants, 11 acquired Eddie V’s restaurants and same-restaurant sales gains. The Eddie V’s acquisition closed November 14, 2011, for $58.6 million; its operating contribution was described as immaterial. Integration-related expenses were $2.4 million for the nine months.
- Food and beverage costs increased to 30.6% of sales in Q3 from 28.9%, and to 30.8% from 28.6% for the nine months, primarily due to seafood and other commodity inflation and unfavorable menu mix. Nine-month total costs and expenses rose to 92.6% of sales from 91.6%.
- Lower labor and SG&A costs as a percentage of sales helped Q3 results, partly offsetting higher food costs. For the nine months, higher food costs and depreciation weighed on earnings. Red Lobster’s Q3 operating margin declined; Olive Garden’s and LongHorn’s increased.
- Management said operating cash flow fell mainly because of inventory-purchase timing and settlement of treasury-lock instruments. Higher capital spending reflected restaurant construction and remodeling.
- The company issued $400 million of 4.5% notes due 2021. Treasury-lock instruments settled at a cumulative loss of $53.7 million; $52.6 million was recorded in accumulated other comprehensive loss and is to be reclassified into interest expense over time. The filing expected $5.3 million of net derivative losses to be reclassified to earnings during the next 12 months.
- Management stated that internal cash generation and the revolving facility should fund fiscal 2012 capital expenditures, dividends, repurchases and operations. The filing refers to fiscal 2012 expectations for restaurant openings, same-restaurant sales, sales growth, diluted EPS growth and capital expenditures, but the provided text does not give clear numerical guidance for those measures.
- Key risks include food and commodity cost volatility, competition, labor and insurance costs, food safety, regulation, adverse publicity, technology and business-continuity risks, restaurant expansion and acquisition execution, and potential goodwill or trademark impairment. Management reported ordinary-course litigation and claims, but did not expect their resolution to materially affect financial position, results or liquidity.
Most important facts for investors to verify
- Whether same-restaurant sales momentum continues, especially at Olive Garden, and whether food-cost inflation or menu mix further pressures margins.
- Cash flow and liquidity trends, including the effect of inventory needs, elevated capital expenditures, share repurchases and dividends.
- Refinancing of the $350 million notes due October 2012, debt levels and continued compliance with revolving-credit covenants.
- Fiscal 2012 numerical guidance and actual performance against it; clear numerical guidance is not included in the provided filing text.
- Integration and valuation of Eddie V’s, and any changes in goodwill or trademark impairment assessments.