Darden Restaurants, Inc. — FY2020 Form 10-K
Business context and reporting period. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse and Cheddar’s Scratch Kitchen. At May 31, 2020, it operated 1,804 company-owned restaurants in the U.S. and Canada and had 62 franchised restaurants. Fiscal 2020 ended May 31, 2020 and comprised 53 weeks; the comparable fiscal 2019 comprised 52 weeks. This is an FY2020 annual report, not a standalone FY2019 fourth-quarter filing.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $7,806.9 million | $8,510.4 million |
| Operating income | $47.9 million | $832.5 million |
| Operating margin | 0.6% | 9.8% |
| Continuing-operations earnings (loss) | $(49.2) million; diluted EPS $(0.40) | $718.6 million; diluted EPS $5.73 |
| Net earnings (loss) | $(52.4) million; diluted EPS $(0.43) | $713.4 million; diluted EPS $5.69 |
| Operating cash flow | $717.4 million | $1,267.6 million |
| Capital expenditures | $459.9 million | $452.0 million |
Sales fell 8.3%, driven principally by the pandemic-related fourth-quarter disruption; combined same-restaurant sales declined 11.0%. Fourth-quarter sales fell 43.0% year over year. The first nine months’ sales were $6.54 billion, up 4.1% year over year. For the full year, food and beverage costs were 28.7% of sales, restaurant labor 34.4%, restaurant expenses 18.9%, and marketing 3.0%. Segment profit margins declined across all reportable segments: Olive Garden 18.3% (down 220 basis points), LongHorn 15.4% (down 280 bps), Fine Dining 16.3% (down 430 bps), and Other Business 8.9% (down 580 bps).
At year-end, cash and cash equivalents were $763.3 million; current assets were $1.10 billion and current liabilities $1.79 billion, a working capital deficit of $691.4 million. Total debt was $1.21 billion, including a $270 million term loan due April 2021; long-term debt, net of discounts and issuance costs, was $928.8 million. The company had repaid its $750 million revolver draw by May 5, 2020 and reported no revolver balance at year-end. Adjusted debt to adjusted total capital was 61%, compared with 58% in FY2019. Operating lease liabilities were $4.44 billion; the filing also reports $4.81 billion of total lease liabilities including finance leases.
Material changes and unusual items
- COVID-19 restrictions closed dining rooms for much of the fourth quarter; restaurants shifted to To Go and delivery, then began phased reopening. At filing, 89% of restaurants could offer some dine-in service. Operating cash flow was negative for most of the fourth quarter but was near break-even by quarter-end.
- Fourth-quarter non-cash impairment charges totaled approximately $390 million. These included $169.2 million of Cheddar’s goodwill impairment and $145.0 million of Cheddar’s trademark impairment; restaurant and other asset impairments and write-downs were also recorded.
- A $145.5 million pre-tax pension settlement charge followed termination and settlement of the primary defined-benefit pension plan.
- The company raised $505.1 million net from a common-stock offering and secured a $270 million 364-day term loan to strengthen liquidity. It suspended dividends and share repurchases in response to the pandemic; FY2020 dividends paid were $322.3 million.
- The adoption of lease accounting guidance increased reported assets and liabilities through recognition of right-of-use assets and lease liabilities; prior-period balance sheets were not restated.
Outlook, risks and contingencies
Because of uncertainty surrounding COVID-19, management did not provide a full FY2021 financial outlook. It expected 35–40 net new restaurants and $250–$300 million of capital expenditures for new restaurants, remodels, maintenance and technology. Management said reopening capacity depended on public-health conditions and local regulations, and warned that renewed outbreaks could reduce capacity or force further dining-room suspensions. It also cited uncertainty around consumer demand, staffing, supply availability and costs, and the ability to maintain liquidity if disruptions persist.
Management intended to claim approximately $39.2 million in refundable employee-retention tax credits under the CARES Act and deferred $24.8 million of employer Social Security taxes. The company reported compliance with its credit-agreement covenants at year-end. It identified $151.5 million of guarantees for assigned leases, while stating that default by the third parties was considered remote. Management did not expect current litigation, individually or collectively, to have a material adverse effect. In the first quarter of FY2021, the company planned voluntary and involuntary employee separations; the collective expense was not yet estimable.
Important facts for investors to verify
- How dine-in capacity, guest traffic and sales recovered after the filing date, and whether further restrictions affected results.
- The timing and impact of repayment or refinancing of the $270 million term loan due April 2021, and compliance with debt covenants under changing earnings and impairment conditions.
- Whether the $39.2 million expected tax credit was claimed and collected, and the treatment of deferred payroll taxes.
- Whether the Cheddar’s and restaurant asset impairment assumptions remain supportable, and whether additional impairments were recorded later.
- When dividends and share repurchases resumed, and the realized FY2021 capital spending and restaurant-opening program versus the stated outlook.