Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended February 28, 2010 (fiscal 2010), compared with the periods ended February 22, 2009. The filing date is April 2, 2010.
Business context and results
Darden operates full-service restaurants in the U.S. and Canada, including Olive Garden, Red Lobster and LongHorn Steakhouse. Results below are in millions of dollars except per-share data.
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $1,874.0 vs. $1,798.9; up 4.2% | $5,249.3 vs. $5,241.9; up 0.1% |
| Continuing-operations earnings | $134.8 vs. $108.1; up 24.7% | $291.0 vs. $249.1; up 16.8% |
| Diluted EPS from continuing operations | $0.95 vs. $0.78; up 21.8% | $2.05 vs. $1.78; up 15.2% |
| Net earnings, including discontinued operations | $134.3 vs. $107.5 | $288.9 vs. $249.2 |
| Net margin | 7.2% vs. 6.0% | 5.5% vs. 4.8% |
Financial position, cash flow and liquidity
- Cash and cash equivalents: $260.3 at February 28, 2010, versus $62.9 at May 31, 2009. Management attributes the increase partly to working-capital timing and preserving cash for debt due in August 2010.
- Operating cash flow from continuing operations: $442.1 for the quarter and $752.6 for nine months, versus $334.1 and $543.9, respectively, in the comparable prior-year periods. Management cites working-capital timing, lower costs, higher earnings and lower income-tax payments.
- Capital expenditures: $109.7 for the quarter and $324.1 year to date, down from $125.2 and $423.0. Spending declined partly because the new Restaurant Support Center was completed in the second quarter.
- Debt: $149.9 current portion of long-term debt and $1,484.9 long-term debt; no short-term debt outstanding. The $150.0 of 4.875% notes due August 2010 is classified as current. Fair value of long-term debt, including current amounts, was $1.67 billion versus $1.63 billion carrying value.
- Credit availability: No borrowings under the $750 million revolving facility; $54.3 of letters of credit backed by it and $645.7 of availability after accounting for a $50 million Lehman-affiliated lender commitment that the lender had failed to fund. Darden reported compliance with facility covenants.
- Current assets and liabilities: $698.8 and $1,250.4, respectively. Current liabilities exceed current assets; management says operating cash generation and the cash-oriented nature of restaurant sales support its working-capital needs.
- Dividends and repurchases: $104.7 in dividends paid in the first nine months; the quarterly dividend had been raised to $0.25 per share. The company repurchased 0.5 million shares for $16.5 year to date and had 9.84 million shares remaining under its repurchase authorization.
Changes versus prior comparable periods
- Quarterly sales growth reflected 50 net new restaurants and a 1.3% combined same-restaurant sales increase at Olive Garden, Red Lobster and LongHorn. Year-to-date sales were nearly flat as the same-restaurant sales decline of 2.8% offset new restaurant contributions.
- Quarterly same-restaurant sales benefited approximately 0.8 percentage points from the Thanksgiving holiday shift and were reduced approximately 0.6 points by more severe weather.
- Food and beverage costs fell as a share of sales: 28.8% versus 30.5% for the quarter and 28.8% versus 30.7% year to date. Restaurant labor rose as a share of sales to 32.7% from 31.6% and 33.2% from 32.0%, respectively.
- Total costs and expenses declined as a share of sales to 90.6% from 91.7% for the quarter and 92.6% from 93.4% year to date. Lower food, utility and maintenance costs and lower interest expense helped; higher wages, bonuses, benefits, depreciation and some SG&A costs partly offset the improvement.
- The effective tax rate decreased to 23.2% for the quarter and 24.7% year to date, from 27.2% and 27.9%. The company cites nontaxable changes in trust-owned life insurance values and favorable resolutions of prior-year tax matters.
Outlook, commentary and risks
- Management stated that operating cash generation and the revolving facility should fund ongoing capital spending, dividends, share repurchases and operations through fiscal 2010. The filing’s forward-looking statements refer to expected 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 measures.
- Management attributed stronger earnings chiefly to sales, lower food and beverage costs, lower utility and maintenance expenses, and a lower tax rate, partly offset by labor cost pressures. Same-restaurant guest counts declined in the quarter at Olive Garden, Red Lobster and LongHorn, despite higher average checks.
- Quarterly diluted EPS growth was reduced by approximately $0.04 due to an adjustment to gift-card redemption-rate assumptions based on observed consumer behavior.
- Key risks include economic weakness and consumer demand, competition, food and utility costs, wage and insurance expense, severe weather, supply interruptions, food safety, litigation, regulation and potential impairment of goodwill or intangible assets. A sufficiently large impairment could affect covenant headroom; management estimated that an after-tax write-down exceeding approximately $1.0 billion at February 28 would have breached the leverage limit, with less headroom possible in future quarters due to seasonality.
- The company disclosed a $0.2 million settlement of a New York Red Lobster wage-and-hour class action, accrued in fiscal 2010, and said it expected payment in the fourth quarter. It also reported $39.4 million of contractual unrecognized income-tax benefits and $2.6 million for tax positions that could materially change within 12 months.
- On March 17, 2010, the board declared a $0.25-per-share dividend payable May 3, 2010. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-restaurant sales and guest-count trends improve, particularly at Red Lobster and LongHorn.
- Whether food-cost savings continue to offset higher labor, benefits, depreciation and marketing expenses.
- How the company funds or refinances the $150 million note maturity in August 2010 and the $75 million notes due in April 2011.
- Whether revolving-credit availability remains adequate given the lender default and the company’s contractual commitments, including $745.4 million of operating-lease payments.
- The effects of gift-card redemption assumptions, tax resolutions and trust-owned life insurance valuation changes on earnings and cash flow.
- Developments in litigation, tax examinations, regulatory changes and potential goodwill or intangible-asset impairment.