Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended November 23, 2014. Amounts are in millions except per-share data. Results are unaudited. Red Lobster is reported as discontinued operations following its sale.
Business context and results
Darden operated 1,520 continuing-operations restaurants across Olive Garden, LongHorn Steakhouse and its other restaurant brands. It completed the sale of 705 Red Lobster restaurants on July 28, 2014; 28 properties remained subject to landlord consents and other requirements at quarter-end.
| Metric | Quarter ended Nov. 23, 2014 | Prior-year quarter | Six months ended Nov. 23, 2014 | Prior-year six months |
|---|---|---|---|---|
| Sales from continuing operations | $1,559.0 | $1,485.6 | $3,154.8 | $3,017.0 |
| Continuing-operations income (loss) | $(30.8) | $6.0 | $(50.1) | $48.3 |
| Diluted EPS from continuing operations | $(0.24) | $0.05 | $(0.39) | $0.36 |
| Net income (loss), including discontinued operations | $(32.8) | $19.8 | $470.4 | $90.0 |
| Diluted EPS, including discontinued operations | $(0.26) | $0.15 | $3.62 | $0.68 |
Continuing-operations sales rose 4.9% for the quarter and 4.6% for the six months, mainly from 53 net new restaurants and positive same-restaurant sales at most brands. Olive Garden U.S. same-restaurant sales were up 0.5% in the quarter but down 0.4% for the six months; LongHorn was up 2.6% and 2.9%, respectively.
Margins, cash flow, debt and liquidity
- Total costs and expenses rose to 103.5% of sales in the quarter from 99.9%; for the six months they were 103.1%, versus 98.3%. Food and beverage costs rose to 31.1% of quarterly sales from 30.1%, reflecting inflation and promotional costs. Labor improved as a share of sales, while restaurant expenses increased, including from higher rent.
- Net interest expense was $33.7 for the quarter and $145.0 for the six months. The six-month amount included $90.5 of debt-retirement costs.
- Continuing-operations operating cash flow was $197.9 for the six months, down from $217.9. Continuing-operations investing cash outflow was $156.4, including $167.4 of capital expenditures. Financing cash outflow was $1,742.8, including $1.0 billion of long-term debt repayments and the $500.0 accelerated share repurchase payment. Discontinued operations provided net cash of $1,760.5, largely reflecting sale proceeds.
- Cash was $157.5 at November 23, 2014. Short-term debt was $20.0, current long-term debt $15.0, and long-term debt $1,468.4. Total debt on those balance-sheet lines was approximately $1.50 billion, down from approximately $2.70 billion at May 25, 2014.
- Darden had a $750.0 revolving credit facility, with $20.0 outstanding and $730.0 available; it reported compliance with its covenants. Current liabilities of $1,306.0 exceeded current assets of $719.4. Management stated that operating cash generation and the facility were expected to fund fiscal 2015 needs.
- Quarterly dividends declared were $0.55 per share. The board subsequently declared another $0.55 dividend, payable February 2, 2015.
Material changes and unusual items
- The Red Lobster sale generated $2.08 billion in net cash proceeds and an $816.6 pretax gain; discontinued operations contributed $520.5 of after-tax earnings for the six months. Thus, reported six-month net income substantially reflects the disposal rather than continuing restaurant operations.
- Quarterly continuing-operations results included $39.7 of asset impairment charges, mainly restaurant assets, and $27.4 of workforce-reduction and related costs. Impairments included eight Olive Garden and three Seasons 52 locations, as well as assets connected with the lobster aquaculture project and a corporate airplane.
- Darden retired $1.0 billion of long-term debt during the first six months and recognized $90.5 of related charges, including cash premiums and non-cash hedge and loan-cost write-offs. Management estimated the debt retirements would reduce annual interest expense by about $49.0, excluding the one-time costs.
- The company paid $500.0 under an accelerated share repurchase program; it received about 8.6 million shares by quarter-end and approximately 1.3 million additional shares in early December.
- Quarterly results included $12.3 of advisory, legal and professional fees tied to shareholder activism and the proxy contest. Twelve new directors replaced the prior board in October 2014. Eugene I. Lee, Jr. was appointed interim CEO while a permanent CEO search continued.
Outlook, commentary and risks
For fiscal 2015, management forecast Olive Garden same-restaurant sales from flat to up 1.0%, LongHorn up 2.0%–3.0%, and a combined 2.0%–3.0% increase for The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s and Yard House. Continuing-operations sales were expected to rise 5.0%–7.0%, including the 53rd week. Management projected diluted continuing-operations EPS growth of 32%–35% versus fiscal 2014, approximately 37 net new restaurants, and capital expenditures of about $300.0. It expected food costs to rise as a percentage of sales, labor to be flat to slightly lower, and general and administrative costs to decline as a percentage of sales.
Key uncertainties include CEO succession and execution of the strategic plan; competition and guest traffic; food, wage, insurance and other cost inflation; food safety, litigation and employment-practice claims; adverse publicity and cyber or operational disruptions; restaurant-location and expansion risks; and possible impairment of goodwill or other assets. Management reported that the Alequin wage-and-hour collective action was decertified and opt-in claims dismissed, with remaining named-plaintiff claims subsequently dismissed; a separate ChHab wage-and-hour case remained pending. The company said loss estimates for these matters could not be made. It also disclosed $139.0 of guarantees related to assigned leased properties, while stating that default was considered remote. Moody’s downgraded Darden’s senior unsecured rating to Ba1 in October, increasing rates on certain notes by 0.25 percentage points.
Important facts for investors to verify
- Whether continuing-operations sales and same-restaurant sales meet fiscal 2015 guidance, particularly at Olive Garden.
- How much of the reported earnings improvement or deterioration reflects one-time debt, impairment, restructuring and activism-related costs versus recurring operations.
- Completion of remaining Red Lobster property transfers and the accounting for deferred sale gains.
- Progress in CEO succession, board-led strategic actions, cost savings and restaurant expansion.
- Debt, covenant headroom, credit ratings, liquidity and the effects of ongoing dividends, repurchases and capital spending.