Darden Restaurants, Inc. — Form 10-Q Summary
Business context and period: Darden operates full-service dining restaurants, including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House and other brands. This unaudited report covers the 13 weeks ended August 25, 2019, the first quarter of fiscal 2020, and compares results with the quarter ended August 26, 2018. Fiscal 2020 includes a 53rd week in the fourth quarter.
Financial performance
| Metric | Quarter ended Aug. 25, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $2,133.9 million | $2,061.4 million | +3.5% |
| Operating income | $201.5 million | $189.1 million | +6.6% |
| Earnings from continuing operations | $171.8 million | $168.9 million | +1.7% |
| Net earnings | $170.6 million | $166.2 million | +2.6% |
| Diluted EPS from continuing operations | $1.38 | $1.34 | +3.0% |
| Diluted net EPS | $1.37 | $1.32 | +3.8% |
| Operating margin | 9.4% | 9.2% | +0.2 percentage points |
- Same-restaurant sales increased 0.9% overall. Sales growth also reflected 40 net new company-owned restaurants compared with the prior-year quarter. The company had 1,793 company-owned restaurants at quarter-end.
- Food and beverage costs and restaurant labor each held at 28.3% and 33.0% of sales, respectively. General and administrative expense declined to 4.6% of sales from 5.1%. Continuing-operations earnings margin was 8.1%, versus 8.2%.
- Olive Garden same-restaurant sales rose 2.2% and LongHorn Steakhouse rose 2.6%. Cheddar’s Scratch Kitchen fell 5.4%; Yard House fell 1.9%; Seasons 52 and Bahama Breeze each fell 4.2%. Segment margins declined at LongHorn, Fine Dining and Other Business, while Olive Garden’s improved.
Cash flow, debt and liquidity
- Cash from continuing operating activities was $253.8 million, up from $206.4 million. Management attributed the increase primarily to timing of accounts-payable and income-tax payments.
- Capital expenditures were $117.1 million, versus $106.4 million. Continuing investing cash outflow was $166.9 million, including $37.0 million of net cash used for the Cheddar’s acquisition. Operating cash flow less capital expenditures was approximately $136.7 million.
- Continuing financing cash outflow was $192.7 million, including $108.1 million of dividends paid and $94.8 million of share repurchases. Cash declined by $106.5 million during the quarter to $350.8 million.
- Long-term debt was $928.0 million. Darden had no borrowings outstanding under its $750 million revolving credit facility and reported compliance with its covenants. The company stated that operating cash generation and the revolver should be sufficient to fund fiscal 2020 needs.
- Adoption of lease accounting added $4.0 billion of operating lease right-of-use assets and $4.3 billion of non-current operating lease liabilities to the balance sheet. Total lease liabilities were $4.7 billion. Current assets were $670.3 million and current liabilities were $1.55 billion; management noted that current liabilities typically exceed current assets in its business.
Material changes, outlook and notable items
- Fiscal 2020 outlook: sales growth of 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 is 10.0%–11.0%; capital expenditures are projected at $450–$500 million.
- Darden adopted ASC 842 lease accounting on May 27, 2019 using the modified retrospective method, with a $3.8 million cumulative-effect adjustment to retained earnings. Comparative balance-sheet periods were not restated.
- On June 26, 2019, Darden acquired five Cheddar’s Scratch Kitchen restaurants (four operating and one closed) from a franchisee for $37.8 million, funded with cash on hand.
- The effective tax rate rose to 9.8% from 4.0%, mainly because the prior-year quarter benefited from equity-compensation-related tax effects and stock-option exercise tax benefits. Discontinued operations recorded a $1.2 million after-tax loss, compared with $2.7 million.
- Restaurant impairment charges of $1.4 million were offset by $1.4 million in sale-leaseback disposal gains, leaving no net impairment or disposal expense. A new $500 million share-repurchase authorization was approved after quarter-end, replacing previous authorizations. The board also declared a $0.88-per-share dividend payable November 1, 2019.
Risks, contingencies and investor verification
- Management identifies risks including food safety, labor and commodity inflation, competition and changing consumer preferences, supply interruptions, cybersecurity, long-term lease commitments, adverse weather, litigation, and impairment of goodwill or trademarks. It reported no material change to previously disclosed risk factors.
- Ordinary-course lawsuits and claims are pending; management does not expect their disposition, individually or collectively, to materially adversely affect financial position, results or liquidity. The company also disclosed lease guarantees and standby letters of credit; no liability was recorded for assigned-lease guarantees because default was considered remote.
- Verify whether same-restaurant sales and margin trends, particularly at Cheddar’s and the Other Business segment, improve; whether the 1.0%–2.0% sales-growth outlook is achieved; and whether labor, commodity and new-restaurant costs affect margins.
- Assess cash use for capital spending, dividends and repurchases alongside the substantial lease obligations recognized under ASC 842. Also monitor the tax rate, acquisition integration, covenant headroom and potential goodwill or trademark impairment.