Darden Restaurants, Inc. — Q3 FY2024 Form 10-Q
Business and reporting period. This unaudited filing covers the three and nine months ended February 25, 2024, compared with the periods ended February 26, 2023. Darden operates full-service restaurant brands in the U.S. and Canada. It acquired Ruth’s Chris Steak House on June 14, 2023; its results are included from the acquisition date.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Sales | $2.975 billion | $2.786 billion | $8.433 billion | $7.719 billion |
| Operating income | $387.4 million | $349.9 million | $918.8 million | $827.3 million |
| Continuing-operations earnings | $313.4 million | $286.8 million | $720.5 million | $667.9 million |
| Net earnings | $312.9 million | $286.6 million | $719.5 million | $666.8 million |
| Diluted EPS from continuing operations | $2.60 | $2.34 | $5.95 | $5.42 |
| Operating margin | 13.0% | 12.6% | 10.9% | 10.7% |
| Continuing-operations net margin | 10.5% | 10.3% | 8.5% | 8.7% |
Q3 sales rose 6.8%, net earnings 9.2% and diluted continuing-operations EPS 11.1% year over year. Nine-month sales rose 9.2%, net earnings 7.9% and diluted continuing-operations EPS 9.8%. The filing attributes sales growth to Ruth’s Chris and other new restaurants, partly offset in Q3 by a 1.0% decline in blended same-restaurant sales. Same-restaurant sales increased 2.2% for the nine-month period; Ruth’s Chris is excluded from this measure until it meets the 16-month operating threshold.
Q3 food and beverage costs improved to 30.9% of sales from 31.8%, while labor costs increased to 31.5% from 31.4%; restaurant expenses were 15.9% versus 15.8%. For nine months, food costs were 31.0% versus 32.4%, labor 31.9% versus 32.1%, and restaurant expenses 16.2% versus 16.3%. Management cited pricing leverage and inflation, with labor inflation a continuing pressure. Interest expense rose to $36.5 million in Q3 from $19.6 million, and to $103.3 million for nine months from $59.2 million, primarily reflecting Ruth’s Chris acquisition financing.
Cash flow, liquidity and debt
- Nine-month cash from continuing operating activities was $1.196 billion, compared with $1.141 billion a year earlier. Capital expenditures were $460.8 million versus $410.5 million; cash used to acquire Ruth’s Chris was $699.9 million.
- Cash and cash equivalents were $243.9 million at February 25, 2024, down from $367.8 million at May 28, 2023. Current assets were $876.4 million and current liabilities $2.272 billion.
- Short-term debt was $158.7 million and long-term debt $1.373 billion. The company had $1.09 billion of available capacity under its $1.25 billion revolving credit facility after commercial paper and letters of credit; it reported covenant compliance and no outstanding revolver borrowings.
- Darden issued $500 million of 6.30% senior notes due 2033 and used the proceeds, together with cash, to repay its $600 million acquisition term loan. Nine-month dividends paid were $472.1 million and share repurchases were $356.6 million.
Material changes and notable items
- The Ruth’s Chris acquisition added 79 company-owned locations to Darden’s restaurant base and contributed to Fine Dining sales growth. Preliminary purchase accounting recorded $360.4 million of goodwill and a $341.7 million trademark. Valuations remain subject to adjustment.
- Ruth’s Chris transaction and integration costs were approximately $6.8 million for Q3 and $44.4 million for nine months, before tax. Nine-month impairment and asset-disposal expense was $11.0 million, compared with a $12.4 million net gain in the prior-year period; current-year items included closures, property sales, acquired-asset write-offs and other impairments.
- Q3 same-restaurant sales varied by brand: Olive Garden declined 1.8%, LongHorn increased 2.3%, Fine Dining declined 2.3%, and Other Business declined 2.6%. Guest counts fell across the cited brands, partly offset by higher average checks.
- The effective tax rate fell to 10.7% in Q3 from 13.2%, primarily due to mark-to-market activity and Ruth’s Chris transaction-cost deductions. The nine-month rate was 11.6% versus 13.0%.
Outlook, risks and contingencies
Management expects FY2024 sales of approximately $11.4 billion, same-restaurant sales growth of 1.5% to 2.0%, approximately 50 to 55 new restaurant openings, and approximately $600 million of capital expenditures. No earnings or EPS guidance is provided in the supplied filing text. The board declared a $1.31-per-share dividend payable May 1, 2024, and on March 20, 2024 authorized a new share-repurchase program of up to $1 billion with no expiration date.
Management identifies risks including commodity, labor, insurance and utility cost pressures; staffing and retention; changing consumer demand and competition; food safety and supply interruptions; cybersecurity and privacy; adverse weather; lease commitments; and successful integration of Ruth’s Chris. The company reports ordinary-course lawsuits and claims, but does not expect their disposition, individually or collectively, to materially adversely affect financial position, results or liquidity. It also reports lease guarantees and other contingent commitments. Management states that asset write-downs exceeding approximately $716.4 million at February 25, 2024 would have been required to breach the revolving-credit leverage covenant, while noting that seasonality could make a lower impairment amount consequential in a future quarter.
Most important facts for investors to verify
- Whether same-restaurant sales and guest-count trends improve, particularly at Olive Garden, Fine Dining and Other Business.
- Progress integrating Ruth’s Chris, including final purchase-price valuations, ongoing costs and segment profitability.
- Whether inflation, labor costs and marketing spending affect restaurant-level margins and FY2024 guidance delivery.
- Capital spending, cash generation, debt levels and interest costs following the acquisition and 2033 notes issuance.
- Execution against the stated sales, openings and capital-expenditure outlook, and the extent of future dividends and repurchases.