Darden Restaurants, Inc. — Form 10-Q Summary
Business context and period: Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse and The Capital Grille. This unaudited report covers the fiscal second quarter and first six months ended November 28, 2021; comparisons are with the periods ended November 29, 2020. The prior-year comparison was significantly affected by COVID-19 restrictions and reduced restaurant traffic.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $2.272 billion, up 37.2% | $4.578 billion, up 43.8% |
| Same-restaurant sales | Up 34.4% | Up 40.7% |
| Operating income | $242.9 million; 10.7% of sales | $523.7 million; 11.4% of sales |
| Net earnings | $193.2 million | $424.1 million |
| Diluted earnings per share | $1.48 | $3.23 |
| Operating cash flow from continuing operations | Not reported separately | $481.5 million, versus $428.6 million |
Quarterly sales growth reflected a 34.4% increase in same-restaurant sales and 34 net additional company-owned restaurants since the prior-year quarter. Segment same-restaurant sales rose across the portfolio; Fine Dining increased 61.6%, while Olive Garden increased 29.3%.
Food and beverage costs were 30.5% of quarterly sales, up from 28.7%, with management citing inflation and unfavorable mix partly offset by pricing. Restaurant labor was 32.8%, versus 32.3%; labor inflation and lower productivity were partly offset by sales leverage. Total operating costs declined to 89.3% of sales from 92.7%, supporting higher operating margin.
Financial position, cash flow and capital allocation
- Cash and cash equivalents were $746.3 million at November 28, down from $1.215 billion at May 30; the cash-flow statement includes $51.5 million of restricted cash.
- Current assets were $1.514 billion and current liabilities $1.781 billion. Long-term debt was $929.0 million. Operating lease liabilities totaled approximately $4.082 billion, current and non-current.
- Six-month investing cash outflow was $177.8 million, including $173.3 million of property and equipment purchases. Financing cash outflow was $721.0 million, including $286.1 million in dividends and $452.3 million in share repurchases.
- The company had no borrowings under its new $1 billion revolving credit facility at quarter-end and reported compliance with its covenants. The facility matures September 10, 2026.
- The board authorized an additional $750 million share repurchase program in September 2021. A $1.10-per-share dividend was declared after quarter-end, payable February 1, 2022.
Outlook, commentary and risks
Management expected fiscal 2022 sales of $9.6–$9.7 billion, same-restaurant sales growth of 29%–31%, 35–40 net new restaurants, and $425 million of capital expenditures. These are forward-looking expectations, not guaranteed results.
Dining rooms were open across the company’s restaurants, with few U.S. capacity restrictions reported, but COVID-19-related requirements and team-member quarantines could disrupt operations. Management also highlighted food and labor inflation, reduced productivity, utility and repair costs, staffing and retention, supply interruptions, competition, consumer demand, leases, and regulatory and litigation risks. Ordinary-course legal matters were not expected to have a material adverse effect. The filing identifies $34.1 million of unrecognized tax benefits that could change within 12 months.
Important facts for investors to verify
- How much of the reported sales rebound reflects recovery from COVID-affected comparisons versus sustained underlying demand; assess same-restaurant sales and traffic trends.
- Whether pricing can continue to offset food, labor and other cost inflation without weakening guest demand or margins.
- Progress against fiscal 2022 sales, restaurant-opening and capital-expenditure outlook, and any subsequent revisions.
- Cash needs and capital allocation, including dividends, repurchases, restaurant investment, debt and lease obligations.
- Developments in COVID-related operating restrictions, staffing disruptions, the tax positions subject to examination, and other disclosed risks.