Darden Restaurants, Inc. — Form 10-Q Summary
Business context and period. Darden owns and operates full-service restaurants in the U.S. and Canada, including Olive Garden, Red Lobster and LongHorn Steakhouse. This unaudited report covers the quarter and six months ended November 27, 2011 (fiscal 2012 Q2), compared with the corresponding periods of fiscal 2011.
Financial performance
| Metric | Fiscal 2012 Q2 | Prior-year Q2 | Fiscal 2012 first six months | Prior-year first six months |
|---|---|---|---|---|
| Sales | $1,831.5 million | $1,726.2 million | $3,773.4 million | $3,532.9 million |
| Earnings from continuing operations | $54.1 million | $75.8 million | $160.8 million | $189.0 million |
| Diluted EPS from continuing operations | $0.41 | $0.54 | $1.19 | $1.34 |
| Net earnings | $53.7 million | $74.5 million | $160.3 million | $187.6 million |
| Pre-tax margin | 4.0% | 6.0% | 5.8% | 7.4% |
| Continuing-operations earnings margin | 3.0% | 4.4% | 4.3% | 5.3% |
| Operating cash flow from continuing operations | Not stated for quarter | Not stated for quarter | $80.3 million | $282.1 million |
- Sales rose 6.1% for the quarter and 6.8% for the six months. Growth reflected 73 net new company-owned restaurants versus the prior-year comparable period, the addition of 11 Eddie V’s restaurants, and blended same-restaurant sales growth at Olive Garden, Red Lobster and LongHorn of 1.8% and 2.4%, respectively.
- Food and beverage costs increased to 31.3% of sales in the quarter from 28.7%, and to 30.9% for the six months from 28.4%. Management cited higher seafood and other commodity costs and unfavorable menu mix. Total costs and expenses rose to 96.0% of quarterly sales from 94.0%, and to 94.2% for the six months from 92.6%.
- Restaurant labor improved as a percentage of sales, while depreciation and amortization increased as a percentage of sales, partly due to new restaurants and remodels. The effective tax rate declined to 25.4% for the quarter and 26.7% for the six months, primarily reflecting tax credits.
- Cash and cash equivalents were $50.2 million at November 27, 2011, versus $70.5 million at May 29, 2011. Current assets were $798.0 million and current liabilities $1.865 billion. Management notes that the cash-oriented nature of restaurant sales allows the company to operate with current liabilities exceeding current assets.
- At period-end, short-term debt was $455.0 million; long-term debt, including its current portion, totaled approximately $1.803 billion. The company had $224.1 million of availability under its $750 million revolving credit facility after commercial paper and letters of credit. It reported compliance with facility covenants.
Changes, outlook and notable items
- Continuing-operations earnings fell 28.6% in Q2 and 14.9% for the first six months; diluted continuing-operations EPS fell 24.1% and 11.2%, respectively. Management attributed the declines mainly to food and beverage costs and higher depreciation, partly offset by sales growth, labor and SG&A leverage, and lower tax rates. Q2 Eddie V’s closing and integration costs of about $1.3 million reduced diluted EPS by approximately $0.01.
- Brand trends diverged in Q2: Olive Garden same-restaurant sales declined 2.5%, while Red Lobster increased 6.8% and LongHorn increased 6.0%. Red Lobster and LongHorn gains included stronger guest counts; Olive Garden’s decline reflected lower guest counts and average check.
- Darden acquired eight Eddie V’s Prime Seafood and three Wildfish Seafood Grille restaurants on November 14, 2011, for $59.2 million cash. Purchase accounting valuations were preliminary; acquired operations were immaterial to reported results.
- Operating cash flow fell sharply year over year, which management primarily attributed to settlement of October 2011 treasury-lock instruments and inventory-purchase timing. Investing cash use was $408.1 million, including $338.4 million of capital expenditures and the Eddie V’s acquisition. Financing cash flow included $279.1 million of share repurchases and $113.6 million of dividends paid.
- The company issued $400 million of 4.5% senior notes due 2021. It also had $350 million of 5.625% notes due October 2012, which management expected to refinance with unsecured debt securities. The quarterly dividend was increased to $0.43 per share; the board subsequently declared another $0.43 dividend payable February 1, 2012.
- The filing discusses fiscal 2012 expectations for restaurant openings, same-restaurant sales, sales growth, diluted EPS growth and capital expenditures, but the supplied filing text does not provide clear numerical guidance targets. Management said available credit and internal cash generation should fund operations, capital spending, dividends and repurchases through fiscal 2012.
- Risks include food and labor costs, competition, economic conditions, food safety, legal and regulatory matters, execution of new restaurant growth and Eddie V’s integration, debt and interest-rate exposure, and possible goodwill or trademark impairment. Management did not expect existing legal matters, individually or in aggregate, to materially affect financial position, results or liquidity.
Investor verification points
- Check whether commodity inflation and menu mix continue to pressure restaurant margins, particularly at Olive Garden.
- Track same-restaurant sales and guest-count trends by brand against the company’s fiscal 2012 outlook.
- Assess operating cash conversion and working-capital movements after the unusually large inventory-related cash use.
- Monitor leverage, the $350 million October 2012 maturity, refinancing terms and remaining revolving-credit availability.
- Verify Eddie V’s integration, final purchase-price allocation and the returns from growth, remodel and repurchase spending.