Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 28, 2021, compared with the periods ended February 23, 2020. Although the request metadata labels this “2020 Q3,” the filing covers Darden’s fiscal 2021 third quarter. Unaudited results; amounts are in millions except per-share data.
Business context and results
Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and The Capital Grille. COVID-19 restrictions and reduced guest traffic continued to weigh on results. By the filing date, nearly all restaurants could offer some indoor dining, subject to local restrictions.
| Metric | Quarter ended Feb. 28, 2021 | Prior-year quarter | Nine months ended Feb. 28, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $1,733.0 | $2,346.5 | $4,916.9 | $6,536.8 |
| Operating income | $148.0 | $278.3 | $325.3 | $640.0 |
| Operating margin | 8.5% | 11.9% | 6.6% | 9.8% |
| Continuing-operations earnings | $129.2 | $233.3 | $263.4 | $430.5 |
| Diluted EPS from continuing operations | $0.98 | $1.90 | $2.00 | $3.48 |
| Net earnings | $128.7 | $232.3 | $260.8 | $427.6 |
Quarterly sales fell 26.1% and nine-month sales fell 24.8%. Combined same-restaurant sales declined 26.7% and 25.5%, respectively; the sales declines were partly offset by 10 net new company-owned restaurants since the prior-year quarter. Nine-month diluted EPS from continuing operations included an approximately $0.28 adverse impact from restructuring charges.
Cash flow, balance sheet and capital
- Operating cash flow: $746.0 for the first nine months, versus $922.4 a year earlier. Capital expenditures were $177.3, down from $374.5. Investing cash outflow was $181.4; financing cash outflow was $335.5.
- Cash and liquidity: Cash was $993.9 at February 28, 2021, up from $763.3 at May 31, 2020. Current assets were $1,300.4 and current liabilities $1,646.5. Darden reported no balance on its $750 million revolving credit facility and said it complied with its covenants.
- Debt and leases: Long-term debt was $929.7; the $270.0 short-term term loan outstanding at fiscal year-end was repaid before maturity. Operating lease liabilities were $4,156.3 non-current, plus $173.1 current; finance lease liabilities totaled $495.8.
- Shareholder returns: Dividends paid were $87.3 in the first nine months, versus $322.3 a year earlier. A $0.88-per-share dividend was declared for payment May 3, 2021. On March 23, 2021, the board authorized a new share repurchase program of up to $500 million.
Material changes and management commentary
- Segment sales declined year over year across all reported segments. Olive Garden’s quarterly same-restaurant sales fell 25.8%; LongHorn’s fell 12.6%; Fine Dining’s fell 45.2%; and Other Business’ fell 36.9%.
- Quarterly segment profit margins were 23.2% for Olive Garden, 18.1% for LongHorn, 15.7% for Fine Dining and 10.5% for Other Business. Olive Garden margin improved, while the other three segments’ margins declined. Management attributed pressure chiefly to COVID-related sales declines, partly offset by lower marketing and labor costs.
- Operating costs consumed 91.5% of quarterly sales, versus 88.1% a year earlier. Restaurant expenses, depreciation and interest rose as a share of sales, primarily due to sales deleverage; lower media spending reduced marketing expense as a share of sales.
- The company incurred $47.8 of corporate restructuring costs in the first quarter, including $38.1 in cash and $9.7 in non-cash costs. The remaining accrued liability was $21.8, with payment expected by the second quarter of fiscal 2022.
- Quarterly and nine-month effective tax rates were 2.3% and 2.6%, respectively. Management cited lower earnings, tax credits, stock-option tax benefits and deferred-compensation hedge effects. A potentially favorable one-time fiscal fourth-quarter tax impact was possible but not quantifiable in the filing.
Outlook, risks and contingencies
Management expected fourth-quarter fiscal 2021 sales of approximately $2.1 billion, 33 net new restaurants for the full year, and fiscal-year capital expenditures of $285–$295 million. It expected dining capacity to increase as public-health conditions improved and restrictions eased, but warned that further outbreaks could again limit or suspend dine-in operations.
Key risks include the continuing effects of COVID-19 and vaccine rollout, guest demand, labor and commodity costs, food safety, supply disruptions, competition, leases, litigation, cyber and technology risks, and impairment of goodwill or other assets. Darden disclosed ordinary-course legal matters that it did not expect, individually or collectively, to materially harm its financial position, results or liquidity. It also reported $128.6 of maximum potential payments under guarantees of assigned leases; management considered third-party default remote. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the fiscal-period comparison: this is the quarter ended February 28, 2021, not a calendar 2020 third quarter.
- Track reopening conditions and same-restaurant sales, particularly whether guest traffic recovers without renewed restrictions.
- Assess the sustainability of margins and cash generation as sales recover and cost pressures, restructuring effects and tax items change.
- Review execution of the $2.1 billion fourth-quarter sales outlook, restaurant-opening target and $285–$295 million capital-spending plan.
- Monitor lease obligations, assigned-lease guarantees, debt ratings and covenant headroom, as well as any actual share repurchases under the new authorization.