Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the three months ended August 30, 2015; comparable period ended August 24, 2014. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V’s. Red Lobster is reported as discontinued operations following its sale.
Financial performance
| Metric | Quarter ended Aug. 30, 2015 | Comparable quarter |
|---|---|---|
| Sales from continuing operations | $1,687.0 million | $1,595.8 million |
| Operating income | $134.2 million | $67.6 million |
| Operating margin | 8.0% | 4.3% |
| Continuing-operations earnings (loss) | $81.0 million | $(19.3) million |
| Diluted EPS from continuing operations | $0.63 | $(0.14) |
| Net earnings | $86.4 million | $503.2 million |
| Operating cash flow, continuing operations | $138.0 million | $77.0 million |
Sales rose 5.7%, reflecting 3.4% combined same-restaurant sales growth and 30 net new company-owned restaurants added since the prior-year quarter. Continuing-operations earnings improved substantially; results also benefited from the prior period’s $80.0 million debt-breakage charge. Net earnings fell 82.8% because the prior-year period included substantial Red Lobster sale-related discontinued-operations earnings.
Continuing-operations costs were 92.0% of sales, down from 95.7%. Food and beverage costs declined to 29.8% of sales from 31.5%; labor was 31.8% versus 31.9%. Management cited pricing and menu mix, sales leverage, cost initiatives and lower promotional costs as contributors. Beef inflation offset sales leverage at LongHorn.
Cash, debt and liquidity
- Cash and equivalents were $690.1 million at August 30, 2015, versus $535.9 million at May 31, 2015. Current assets were $1,204.6 million and current liabilities $1,142.6 million.
- Long-term debt, including its current portion, totaled approximately $1.45 billion. The $750 million revolving credit facility was undrawn, and the company reported compliance with its covenants.
- Investing cash flow from continuing operations was positive $61.6 million, including $130.2 million of proceeds from property disposals, principally closed sale-leasebacks. Capital expenditures were $64.9 million.
- Financing cash use was $17.0 million, including $70.0 million of dividends paid and $15.0 million of long-term debt repayment. The quarterly dividend declared was $0.55 per share.
Segments and material changes
Segment profit was $310.7 million versus $248.7 million. Olive Garden profit margin increased to 20.3% from 16.2%; LongHorn was flat at 14.9%; Fine Dining rose to 15.7% from 14.7%; and Other Business rose to 17.9% from 14.3%. Brand same-restaurant sales increased 2.7% at Olive Garden, 4.4% at LongHorn, 7.2% at The Capital Grille, 3.4% at Yard House, 1.8% at Bahama Breeze, 3.9% at Seasons 52 and 5.1% at Eddie V’s.
Discontinued operations contributed $5.4 million after tax in the current quarter, including an $8.3 million pre-tax Red Lobster-related gain, compared with $522.5 million after tax in the prior-year quarter, which included an $817.2 million pre-tax gain. Three Red Lobster properties remained held for sale pending landlord consents and other requirements; Darden expected to recognize the related gain when these conditions were satisfied, expected in fiscal Q2 2016.
Outlook, risks and unusual items
- For fiscal 2016, management expected combined same-restaurant sales growth of 2.0%–2.5%, continuing-operations sales growth of 2.0%–2.5%, approximately 18–22 new restaurants, and capital expenditures of $230–$255 million.
- Darden had completed 33 sale-leaseback transactions in the quarter and 47 in total, generating approximately $175 million. It also planned a REIT transaction involving 424 restaurant properties and was exploring monetization of its headquarters. These plans remained subject to execution; management said there was no assurance the REIT transaction would be completed. Proceeds, with cash on hand, were intended to support repayment of up to $1.0 billion of long-term debt.
- Key disclosed risks include food safety, competition, labor and commodity cost pressures, regulation, cybersecurity, adverse publicity, severe weather, and execution of the strategic real-estate plan. Management believed existing litigation would not materially adversely affect the company, individually or in aggregate.
- Standby letters of credit totaled $133.3 million; guarantees on assigned leased properties had a maximum potential payment of $150.9 million. The filing reported no known nonperformance under those guarantees. Management warned that sufficiently large asset impairments could increase leverage and potentially breach the credit agreement covenant.
Important facts for investors to verify
- Whether same-restaurant sales and operating-margin improvements persist, particularly as beef, labor and other input costs change.
- Progress and terms of the planned REIT, remaining property monetizations, and whether proceeds are applied to debt reduction as intended.
- Completion of the remaining Red Lobster property transfers and recognition of the deferred gain.
- Debt repayment, interest costs, credit ratings and covenant headroom; the filing cited a Moody’s downgrade to Ba1 and related increases in certain note coupons.
- Performance against fiscal 2016 sales, restaurant-opening and capital-expenditure outlook; the company cautioned that one quarter’s results may not indicate full-year performance because of seasonality.