Darden Restaurants, Inc. — Fiscal 2020 Second-Quarter Form 10-Q
Business context and period. Darden owns and operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and Yard House. This unaudited report covers the quarter and six months ended November 24, 2019; comparisons are with the periods ended November 25, 2018. Fiscal 2020 includes a 53rd week in the fourth quarter.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $2,056.4 million, up 4.2% | $4,190.3 million, up 3.9% |
| Operating income | $160.2 million, up 8.2%; margin 7.8% vs. 7.5% | $361.7 million, up 7.3%; margin 8.6% vs. 8.4% |
| Net earnings from continuing operations | $25.4 million vs. $115.9 million | $197.2 million vs. $284.8 million |
| Diluted EPS from continuing operations | $0.21 vs. $0.92 | $1.59 vs. $2.26 |
| Operating cash flow from continuing operations | Not separately presented | $443.1 million vs. $433.9 million |
Combined same-restaurant sales rose 2.0% for the quarter and 1.5% for the six months. Quarter sales growth included 37 net new company-owned restaurants versus the prior-year quarter. LongHorn’s quarterly same-restaurant sales increased 6.7%; Olive Garden’s increased 1.5%. Cheddar’s, Bahama Breeze and Seasons 52 posted quarterly same-restaurant sales declines.
For the quarter, food and beverage costs improved to 28.4% of sales from 28.5%, while labor rose to 33.7% from 33.6% and marketing to 3.2% from 2.9%. Six-month food costs were 28.3% of sales versus 28.4%; labor was flat at 33.3%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $157.3 million at November 24, 2019, down from $457.3 million at fiscal year-end. Current assets were $535.5 million and current liabilities $1,557.5 million.
- Long-term debt was $928.2 million. Darden had no borrowings under its $750 million revolving credit facility and reported compliance with its covenants. The facility matures in October 2022.
- Cash used in investing was $309.7 million for the six months, including $256.5 million of capital expenditures and $37.0 million for the Cheddar’s restaurant acquisition. Cash used in financing was $433.8 million, including $230.9 million of share repurchases and $215.7 million of dividends paid.
- Darden adopted lease accounting guidance in fiscal 2020. At November 24, operating lease liabilities totaled $4,458.3 million and finance lease liabilities $327.6 million; these are separate from reported long-term debt.
Material changes, outlook and risks
Unusual item: A $147.1 million pre-tax pension settlement charge followed termination and settlement of Darden’s primary defined-benefit pension plan. It drove reported other expense, contributed to a quarterly pre-tax loss of $6.2 million, and reduced diluted EPS from continuing operations by approximately $0.90. A tax benefit resulted in continuing-operations earnings of $25.4 million. The charge is non-cash in the operating cash-flow reconciliation; Darden also contributed approximately $12.2 million to the plan.
Fiscal 2020 outlook: Management expected sales from continuing operations to grow 5.3%–6.3%, including the 53rd week, same-restaurant sales growth of 1.0%–2.0%, and approximately 50 new restaurants. Expected annual effective tax rate was 10.0%–11.0%; capital expenditures were projected at $450–$500 million. Management said operating cash generation and the revolving facility should fund planned capital spending, dividends, repurchases and operations through fiscal 2020.
Management cited inflation in labor and food costs, including beef, and pressure on certain brands’ segment margins. Risks identified include food safety, labor availability and costs, commodity prices, competition, consumer demand, long-term lease commitments, technology and cybersecurity, litigation, weather, and potential impairment of goodwill or trademarks. Darden reported ordinary-course legal claims and said their disposition was not expected to have a material adverse effect. It also disclosed $143.2 million of maximum potential payments under guarantees on assigned leases, with no liability recorded because default was considered remote.
Important facts for investors to verify
- How sales and same-restaurant sales trends develop, particularly guest counts and weaker-performing brands.
- The pension settlement’s nonrecurring impact and the sustainability of earnings and cash flow excluding it.
- Lease obligations alongside debt, liquidity, and compliance with the credit facility’s lease-adjusted covenant.
- Whether planned capital expenditures, dividends and share repurchases remain consistent with cash generation and the fiscal 2020 outlook.
- Progress against the stated sales, same-restaurant growth, restaurant-opening and tax-rate expectations.