Darden Restaurants, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Fiscal second quarter and six months ended November 27, 2022; comparisons are with the periods ended November 28, 2021. Darden operated 1,887 company-owned restaurants, with additional franchised and joint-venture locations. Financial statements are unaudited.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Sales | $2,486.5 million | $2,272.2 million | $4,932.6 million | $4,578.2 million |
| Operating income | $233.2 million | $242.6 million | $477.4 million | $523.2 million |
| Continuing-operations earnings | $187.5 million | $193.4 million | $381.1 million | $425.1 million |
| Net earnings | $187.2 million | $193.2 million | $380.2 million | $424.1 million |
| Diluted EPS, continuing operations | $1.52 | $1.48 | $3.09 | $3.24 |
- Sales increased 9.4% in the quarter and 7.7% for the six months. Blended same-restaurant sales rose 7.3% and 5.7%, respectively; growth also included sales from 35 net new restaurants.
- Despite sales growth, operating income fell 3.9% in the quarter and 8.8% for the six months. Operating margin declined to 9.4% from 10.7% in Q2 and to 9.7% from 11.4% year to date. Food and beverage costs rose to 32.9% of sales from 30.5% in Q2, primarily due to inflation and menu mix, partly offset by pricing.
- Diluted continuing-operations EPS rose 2.7% in Q2 despite lower earnings, alongside lower weighted-average diluted shares (123.1 million versus 130.5 million). Six-month diluted EPS declined 4.6%.
- Q2 segment profit margins fell year over year across all reported segments: Olive Garden 18.6% (down 320 basis points), LongHorn 14.3% (down 100), Fine Dining 19.3% (down 170) and Other Business 11.6% (down 200). Management cited food costs, and for Fine Dining and Other Business also labor costs, partly offset by positive same-restaurant sales.
Cash flow, liquidity and capital
- Six-month cash from continuing operating activities was $635.6 million, up from $481.5 million, primarily reflecting a more favorable working-capital change despite lower earnings. Investing cash use was $273.4 million; capital expenditures were $280.3 million, versus $173.3 million a year earlier.
- Financing cash use was $534.9 million, including $296.5 million of dividends, $299.2 million of share repurchases and $253.5 million of short-term debt repayments, partly offset by $253.5 million of short-term debt issuance. Cash and cash equivalents were $240.7 million at period end, down from $420.6 million at fiscal year-end; cash-flow statement cash including restricted cash was $300.3 million.
- Current assets were $892.1 million and current liabilities $1,906.4 million. Management says it typically carries current liabilities above current assets, relying principally on operating cash flows and cash sales.
- Short-term debt was $58.0 million and long-term debt $885.8 million. The $1 billion revolving facility had no direct borrowings; after commercial paper, $942.0 million remained available. Darden reported compliance with facility covenants. Lease liabilities totaled $5,017.6 million, including $3,730.5 million of non-current operating lease liabilities.
- The board authorized a new $1 billion share repurchase program in June 2022. Darden repurchased 2.4 million shares for $299.2 million in the six-month period. Dividends declared were $2.42 per share for the half-year; a subsequent $1.21-per-share dividend was declared for payment February 1, 2023.
Outlook, commentary and risks
- Fiscal 2023 guidance: sales of $10.3–$10.45 billion, same-restaurant sales growth of 5.0%–6.5%, 55–60 new restaurant openings, and capital expenditures of $525–$575 million.
- Management said wage and other cost inflation remained above recent norms, with staffing and supply-chain challenges continuing. Risks include commodity, labor, utility and insurance cost pressures; hiring and retention; food safety; supply interruptions; competition and consumer demand; weather and climate events; technology and cybersecurity; leases; litigation; and potential impairment of goodwill or other assets.
- Property-sale gains reduced reported impairment and disposal expense by $8.8 million in Q2 and $13.7 million for the six months. Derivative-related gains also affected results, including a $10.8 million Q2 gain in general and administrative expenses from derivatives not designated as hedges.
- Darden said it did not expect the Inflation Reduction Act to have a material adverse financial impact. Its 1% excise tax on share repurchases applies after December 31, 2022; the 15% corporate alternative minimum tax is expected to apply beginning in fiscal 2024.
- Ordinary-course lawsuits and claims are ongoing; management does not expect their resolution, individually or collectively, to materially adversely affect financial position, results or liquidity. Standby letters of credit were $85.4 million, surety bonds $19.3 million, and maximum potential guarantees on assigned leases $91.4 million. No material changes to the prior annual report’s risk factors were reported.
Most important facts for investors to verify
- Whether pricing and sales growth can continue to offset food, labor and other inflation, and whether guest-count trends improve.
- Delivery of the fiscal-year sales, restaurant-opening and capital-spending guidance, particularly as capital expenditures accelerate.
- Cash generation and liquidity after dividends, buybacks, capital expenditures and lease obligations; review debt maturities and facility covenants.
- How much reported earnings and margins depend on property-disposal gains and derivative valuation changes, and the effect of the share-repurchase excise tax.