Darden Restaurants, Inc. — Form 10-Q Summary
Business context and period: Darden owns and operates full-service restaurant brands including Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52 in the U.S. and Canada. This unaudited filing covers the quarter and first nine months of fiscal 2011, ended February 27, 2011; comparisons are with the corresponding fiscal 2010 periods unless noted.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $1.977 billion, up 5.5% | $5.510 billion, up 5.0% |
| Earnings from continuing operations | $151.7 million, up 12.5% | $340.8 million, up 17.1% |
| Diluted EPS from continuing operations | $1.08, up 13.7% | $2.42, up 18.0% |
| Net earnings, including discontinued operations | $151.2 million | $338.8 million |
| Operating cost and margin indicators | Total costs and expenses were 89.9% of sales, versus 90.6%; earnings before tax margin was 10.1%, versus 9.4%; net margin was 7.6%, versus 7.2%. | Total costs and expenses were 91.6% of sales, versus 92.6%; earnings before tax margin was 8.4%, versus 7.4%; net margin was 6.1%, versus 5.5%. |
Quarterly food and beverage costs rose to 28.9% of sales from 28.8%, reflecting higher seafood and other commodity costs and menu mix, partly offset by pricing. Restaurant labor and restaurant expenses improved as a share of sales. Selling, general and administrative expense increased to 9.8% of sales from 9.0%, including higher media, compensation and travel costs and impairment charges. For the nine months, food, labor and restaurant expenses improved as a share of sales, while SG&A rose to 10.0% from 9.7%.
Cash flow, debt and liquidity
- Operating cash flow from continuing operations was $662.7 million for the nine months, down from $752.6 million. Management cited timing of inventory purchases and product demand, and higher income-tax payments, partly offset by higher earnings.
- Capital expenditures were $390.1 million, up from $324.1 million, mainly for restaurant construction and remodeling. Cash and cash equivalents fell to $89.7 million from $248.8 million at May 30, 2010; the cash decrease for the period was $159.1 million.
- At February 27, 2011, the balance sheet showed $64.0 million of short-term debt, $75.0 million of current long-term debt and $1.408 billion of long-term debt, less current portion. The company had repaid $150 million of notes at maturity during the period.
- The $750 million revolving credit facility had no direct outstanding balance; $64.0 million of commercial paper and $68.2 million of letters of credit were backed by it. Available credit after these items was $617.8 million. The company reported compliance with facility covenants.
- Financing included $275.9 million of share repurchases and $132.0 million of dividends paid. The quarterly dividend had increased to $0.32 per share from $0.25; a further $0.32 dividend was declared after quarter-end, payable May 2, 2011.
Operating trends and changes
Sales growth reflected 66 net new restaurants since the prior-year quarter and blended U.S. same-restaurant sales growth of 0.9% for Olive Garden, Red Lobster and LongHorn Steakhouse. LongHorn’s quarterly same-restaurant sales increased 6.1%; Olive Garden was flat and Red Lobster increased 0.1%. Guest counts declined 1.2% at both Olive Garden and Red Lobster for the quarter, offset by higher average checks. For the first nine months, Red Lobster same-restaurant sales declined 1.0%, while Olive Garden increased 1.6% and LongHorn increased 5.1%. The total restaurant count was 1,868, compared with 1,802 a year earlier.
Quarterly earnings improvement was attributed primarily to sales growth and lower labor, restaurant and depreciation costs as a share of sales, partly offset by food costs, SG&A, interest and a higher tax rate. The nine-month effective tax rate was 26.1%, compared with 24.7%; management attributed the increase mainly to favorable resolution of prior-year tax matters in fiscal 2010 and higher pretax earnings.
Outlook, risks and unusual items
- The filing discusses fiscal 2011 expectations for restaurant additions, U.S. same-restaurant sales, sales growth, diluted EPS growth and capital expenditures, but the provided filing text does not provide clear numerical guidance for these measures. Management said operating cash generation and the revolving facility were expected to fund fiscal 2011 capital spending, dividends, repurchases and operations.
- Management expected to issue unsecured debt securities during fiscal 2012 to refinance the notes that matured in August 2010 and the $75 million notes due April 2011.
- Impairment charges included $2.0 million on assets held for disposal and $2.1 million on assets held and used during the nine months. SG&A also included charges related to an early restaurant lease cancellation; the amount is not clearly stated.
- Risks highlighted include food safety and adverse publicity, competition, labor and insurance costs, food and commodity-price volatility, supply interruptions, economic conditions, interest rates, technology and cybersecurity, litigation, expansion of newer brands, and possible goodwill or intangible-asset impairment. The company said ordinary-course litigation was not expected to have a material adverse effect. It also warned that impairment could raise leverage and potentially threaten covenant compliance.
- The company reported no material changes to previously disclosed risk factors, no material changes to internal control over financial reporting, and effective disclosure controls as of February 27, 2011.
Important facts for investors to verify
- Whether same-restaurant sales and guest-count trends improve, particularly at Olive Garden and Red Lobster, and whether LongHorn’s growth continues.
- How food and commodity inflation, pricing and higher marketing and compensation expenses affect margins in subsequent quarters.
- Cash generation relative to elevated capital spending, dividends and share repurchases, and the implications of cash falling to $89.7 million.
- Refinancing plans and timing for the $75 million April 2011 maturity and other debt, alongside the company’s available credit and covenant headroom.
- Any further impairment charges, developments in litigation or contingencies, and the actual fiscal 2011 guidance figures, which are not clear in the filing text provided.