Darden Restaurants, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Second quarter and six months ended November 25, 2012; comparisons are to the periods ended November 27, 2011. Darden operates full-service restaurant brands in the U.S. and Canada. Results include Yard House from its August 29, 2012 acquisition.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Sales | $1,960.0m | $1,831.5m | $3,994.8m | $3,773.4m |
| Earnings from continuing operations | $33.7m | $54.1m | $144.8m | $160.8m |
| Diluted continuing EPS | $0.26 | $0.41 | $1.10 | $1.19 |
| Net earnings | $33.6m | $53.7m | $144.4m | $160.3m |
| Net interest expense | $32.9m | $25.2m | $60.8m | $46.9m |
Sales increased 7.0% in the quarter and 5.9% year to date, primarily from new restaurants and the 40-unit Yard House acquisition. Darden reported blended U.S. same-restaurant sales declines of 2.7% for Olive Garden, Red Lobster and LongHorn in Q2, and 1.4% for the six-month period. Q2 earnings from continuing operations fell 37.7%; six-month earnings fell 10.0%.
Margins: Q2 total costs and expenses rose to 97.8% of sales from 96.0%; earnings before tax margin declined to 2.2% from 4.0%, and continuing-operations margin to 1.7% from 3.0%. For six months, total costs and expenses were 95.3% of sales versus 94.2%; earnings before tax margin was 4.7% versus 5.8%, and continuing-operations margin was 3.6% versus 4.3%.
Management attributed the earnings decline mainly to higher restaurant expenses, SG&A, depreciation and interest as a share of sales. Lower food and beverage costs as a percentage of sales and a lower effective tax rate partly offset these pressures. Yard House acquisition costs reduced diluted continuing EPS by approximately $0.05 in Q2 and $0.06 year to date.
Cash flow, balance sheet and capital
- Six-month cash flow: Operating cash flow from continuing operations was $267.6m, versus $80.3m. Capital expenditures were $355.2m; operating cash flow less capital expenditures was negative $87.6m. Investing cash use was $949.4m, including $578.4m net cash used for Yard House.
- Financing and cash: Financing provided $670.2m; cash declined $9.1m to $61.4m. Dividends paid were $128.5m and treasury-stock purchases were $52.3m.
- Debt and liquidity at November 25: Short-term debt was $376.0m and long-term debt was $2,503.5m, or $2,879.5m combined, compared with $2,066.3m of short-term and long-term debt at May 27. Cash was $61.4m. The $750m revolving facility had no direct borrowings; $376m of commercial paper was outstanding and $374m of facility capacity remained. Darden was compliant with its credit covenants.
- Current assets were $800.6m and current liabilities $1,543.6m (a calculated current ratio of approximately 0.52). Management said operating cash generation and revolving credit capacity should fund fiscal 2013 operations, capital spending, dividends and repurchases.
- Darden issued $450m of 3.350% notes due 2022, $80m of 3.790% notes due 2019 and $220m of 4.520% notes due 2024, and borrowed $300m under a term loan. It also repaid $350m of notes at maturity. The quarterly dividend was increased to $0.50 per share, indicating $2.00 annually for fiscal 2013.
Material developments, outlook and risks
- Yard House: Acquired for $585m cash, adding 40 restaurants (41 were open at quarter-end after one new opening). Preliminary purchase accounting recorded $366.3m of goodwill and a $109.3m trademark; valuations remained subject to adjustment. Acquisition and integration expenses were $11.6m for the six months.
- Brand trends: Q2 same-restaurant sales declined 3.2% at Olive Garden, 2.7% at Red Lobster and 0.8% at LongHorn. Guest counts were particularly weak at Olive Garden, down 6.9%, partly offset by a higher average check. Darden’s restaurant count increased to 2,075 from 1,936 a year earlier.
- Outlook: The filing discusses expected fiscal 2013 restaurant growth, same-restaurant sales, sales growth, diluted EPS growth and capital expenditures, but the provided filing text does not give clear numerical targets for these items. Management cautions that quarterly results are seasonal and not necessarily indicative of full-year results.
- Key risks: Weak guest traffic and competition; food, labor, insurance and utility costs; food safety and supply interruptions; successful Yard House integration and added acquisition debt; impairment of goodwill or trademarks; economic and weather disruptions; and interest-rate, commodity, foreign-exchange and equity-market exposures. Management estimated that an impairment exceeding approximately $575m at quarter-end could cause the credit-agreement leverage ratio to exceed its limit, with a lower threshold possible in future seasonal periods.
- Darden reported ordinary-course lawsuits and claims, but said their disposition was not expected to materially adversely affect financial position, results or liquidity. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether same-restaurant sales and guest-count trends improve, especially at Olive Garden and Red Lobster.
- Yard House integration, final purchase-price allocation and contribution to earnings relative to acquisition costs and added debt.
- Restaurant-level expense, SG&A and depreciation trends, along with the effect of commodity and wage inflation.
- Debt levels, interest expense, commercial-paper access and continued compliance with credit covenants.
- Full-year fiscal 2013 sales, EPS, restaurant-opening and capital-expenditure expectations; specific numerical guidance is not clear in the provided filing text.